Overview of Foreign Exchange Market in the perspective of Bangladesh

1. Presentation
on
Foreign Exchange Market

2. Nazmoon Nahar
Nusrat Nasmin
Samira Islam
Sadia Amin
ID# 33023
ID# 33020
ID# 33047
ID# 33009
Group Composition

3. Definition of Foreign Exchange Market
• a market where trading of currencies takes place
• operation takes place through electronic media using
dealing room of Bank/ financial institution
• assists international trade and investments by enabling
currency conversion - typically a party purchases some
quantity of one currency by paying for some quantity of
another currency.

4. History
Evolution of Currency Exchange system:
Gold Standard
Smithsonian Agreement
Floating Rate System

5. History (Cont.)
Most countries use one of the following:
• Dollarization: This refers to the replacement of a local
currency with U.S. dollars.
• Pegged rate: In this system, the home currency’s
value is pegged to a foreign currency and moves in
line with that currency.
• Managed floating rate: In this system, exchange
rates are allowed to move freely on a daily basis and
no official boundaries exist.

6. Why investors choose Foreign Exchange
Market
• Diversification
• Level Playing Field
• Global Economic Hedge
• Capital Appreciation
• Hedge against Political and Event Risk

7. Advantages of Foreign Exchange Market
• Market Volume - higher than other markets
• Flexibility - no restriction on the amount of money that
can be used for trading
• Electronic Trading – can be traded either at dealing
center, or at home, via phone or any Internet-connected
computer
• Completely commission free - completely commission
free.
• Trading Options – flexibility on currency pairs, spot trade
,future agreement, different sizes with different maturities
• Transaction Costs - low transaction costs as compared
to other markets

8. Disadvantages of Foreign Exchange Market
• Lack of Regulation –
 lack of regulation leaves investors vulnerable to
unethical brokers
 almost no provision of severe punishment due to the lack
of an enforcement agency
• 24/7 Market –
 24/7/365 market operation can make/ lose fortunes on
one side of the globe and vice versa

9. Characteristics of the Foreign Exchange
Market
• Lower Trading Cost – facilitates small, individual
investors to make decent profits from foreign exchange
trading; the possible losses are also much lower
• Excellent Transparency - free access to market data and
information
• Superior Liquidity - enables traders to easily exchange
currencies without affecting the prices of the currencies
being traded
• Strong Market Trends - Most traders use technical
analysis to analyze past and present foreign exchange
market data and then search for trends

10. Financial Instruments of Foreign Exchange
Market
• Designated financial instruments are:
 Spot
 Forward
 Future
 Option
 Swap
 Exchange traded fund

11. Functions of the Foreign Exchange Market

12. Types of Foreign Exchange Rates
Foreign
Exchange Rates
Fixed Exchange
Rate System
Floating Exchange
Rate System
Pegged Exchange
Rate System

13. Factors affecting Movement of Exchange Rates
Inflation
Rates
Speculation
Recession
Political
Stability
and
Performanc
e
Terms of
Trade
Governmen
t Debt
Country’s
Current
Account /
Balance of
Payments
Interest
Rates
Factors
affecting
Exchange
Rates

14. Effect of change in factors on Exchange Rate
SI. No. Change in Factors Effect
1. Lower inflation rate Appreciation in the
value of its currency
2. Increases in interest rates Appreciation in the
value of its currency
3. Deficit in current account Depreciation in the
value of its currency
4. Higher government debt Decrease in the value
of its exchange rate

15. Effect of change in factors on Exchange Rate
(Contd.)
SI. No. Change in Factors Effect
5. Exports prices rise at a greater rate
than its imports prices
Increase in its currency's
value
6. Political instability Depreciation in its
exchange rates
7. Country experiences a recession Currency weakens;
decrease in the
exchange rate
8. Expectation of rise in currency value The value of the
currency will rise,
exchange rate will also
rise

16. Participants in Foreign Exchange Market
• Governments and Central Banks
• Large Banks and Financial Institutions
• Large Commercial Enterprises
• Hedgers
• Foreign Exchange Brokers
• Speculators

17. Foreign Exchange Risk
• financial risk
• an investment's value changing due to the changes in
currency exchange rates
• affects businesses that export and/or import their
products, services and supplies

18. Types of Risk:
Risk
Transaction
Exposure
Economic
Exposure
Translation
Exposure

19. • Transaction Exposure:
 If currencies change before the services are delivered or
before the transaction is settled
• Economic Exposure:
 Because of unexpected currency rate volatility due to
currency rate fluctuations
• Translation Exposure:
 Occurs due to the translation of important figures in
financial statements from the domestic currency to
another currency

20. Thank You