To date, there is no exchange rate model that can predict future currency prices with 100% accuracy. In rapidly growing global foreign exchange markets, currency movements become harder to predict as more participants enter the market on a daily basis, bringing with them all their research opinions, emotions, and expectations about where currencies should be headed. Currency movements in the short term can be influenced by publicly available information like the release of the country’s gross domestic product data, the consumer price index, or employment data. The following publicly available information can have immediate impact on currency movements: Local economic data releases and the anticipation of those releases. Economic data releases in foreign countries, especially of major trading partners, and the anticipation of those releases. Central banks, such as the U.S. Federal Reserve or the European Central Bank, raising or lowering interest rates. Central banks making public their thoughts on Continue reading
Forex Trading
Factors Affecting the Forex Market
The exchange value of a currency, or the rate of exchange, fluctuates with changes in demand and supply. The factors which affect the demand for and the supply of a currency are many and varied. There are some factors which operate in the short period and have influence on day-to-day- fluctuations in rates of exchange. The commercial and financial relationship between trading countries is now extensive and payments on various accounts fall, due for early settlement. These payments constitute the short-term demand and supply in regard to currencies. There are, however, changes in currency and credit conditions and political and industrial conditions which have their influence on exchange rates only in the long period. The factors affecting Forex market may be summarized thus: Short Term Factors Affecting the Forex Market 1. Commercial Factors One of the important factors influencing the demand for and supply of currencies is trade in merchandise, Continue reading
Spot and Forward Foreign Exchange Rates
There are two types of foreign exchange rates, namely the spot rate and forward rates ruling in the foreign exchange market. The spot rate of exchange refers to the rate or price in terms of home currency payable for spot delivery of a specified type of foreign exchange. The forward rate of exchange refers to the price at which a transaction will be consummated at some specified time in future. In modern times the system of forward rate of foreign exchange has assumed great importance in affecting the international capital movements and foreign exchange banks play an important role in this respect by matching the purchases and sales of forward exchange on the part of would be importers and would be exporters respectively. The system of forward foreign exchange rate has actually been developed to minimize risks resulting from the possibility of fluctuations over time in the spot exchange rate Continue reading
Booking of Forward Exchange Contracts and Exchange Control Regulations
Forward exchange contract is a device which can afford adequate protection to an importer or an exporter against exchange risk. Under a forward exchange contract a banker and a customer or another banker enter into a contract to buy or sell a fixed amount of foreign currency on a specified future date as a predetermined rate of exchange. Our exporter, for instance, instead of groping in the dark or making a wild guess about what the future rate would be, enters into a contract with his banker immediately. He agrees to sell foreign exchange of specified amount and currency at a specified future date. The banker on his part agrees to buy this at a specified rate of exchange. The exporter is thus assured of his price in the local currency. In our example, the exporter may enter into a forward contract with the bank for 3 months delivery at Continue reading
Cancellation and Extension of Forward Exchange Contracts
The customer may approach the bank for cancellation when the underlying transactions becomes infructrious, or for any other reason he wishes not to execute the forward contract. If the underlying transaction is likely to take place on the day subsequent to the maturity of the forward contract already booked, he may seek extension in the due date of the contract. Such requests for cancellation or extension can be made by the customer on or before the maturity of the forward contract. Cancellation on Due Date When the forward purchase contract is cancelled on the due date, it is taken that the bank purchases at the rate originally agreed and sells the same back to the customer at the ready TT rate. The difference between these two rates is recovered from/paid to the customer. If the purchase rate under the original forward contract is higher than the ready TT selling rate, Continue reading
Features of Forward Exchange Contract
The following are the features of a forward exchange contract. FEDAI has also laid down certain guidelines defining certain aspects of forward exchange contract. a) Parties: There are two parties in a forward exchange contract. They can be, A bank and a customer. Two banks in the same country. Two banks in different countries. b) Amount: forward exchange contracts are entered into for a definite sum expressed in foreign currency. c) Rate: the rate at which the conversion of foreign exchange is to take place at a future date is agreed upon at the time of signing the forward contract which is known as the contracted rate and is to be mentioned in the contract. d) Date of Delivery: Date of delivery in a forward contract means the future date on which the delivery of foreign exchange is to take place and is computed from the spot date or date of Continue reading