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Case Study On Foreign Exchange Market In India

The foreign exchange market consists of the interbank market, customers (banks, corporations, individuals, fund managers, etc.) and derivative exchanges. The interbank market is a wholesale market which does not have a centralized location for trading. Participants in this market, mostly commercial and investment banks, trade directly with each other or through brokers. Business is conducted over the telephone or electronically. The foreign exchange market is 24-hour market. The trading day begins in Asia, extends into Europe and then into the US. In foreign exchange, every position involves buying one currency and selling another. The dollar is by far the most widely traded currency. This is because of its multiple roles: as an investment currency in many capital markets; a reserve currency for many central banks; a transaction currency in many international commodity markets; and an invoice currency in many contracts. Factors which influence an exchange rate include political and economic


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One area that allows banks to develop niches is that of exoticcurrencies. An exotic is a currency from a developing country,such as the Russian ruble, the Malaysian ringgit, and theMexican peso. Exotics are difficult for corporations to work with because the volume of activity in those currencies is prettysmall, so the costs of dealing with those currencies are relativelyhigh. It is hard to get a good price, and the bid/ask spread isusually higher than would be the case for a widely tradedcurrency like the Japanese yen. In addition, local regulationsgoverning the use of exotic currencies change daily, realignmentsof exchange rates are common, and the volume of activity inthe currencies can be subject to wide swings. Banks such asCitigroup help their clients with exotics by cutting through theregulations on buying and selling, dealing with difficultexchange-rate systems, working with exchange controls oninvestments, and getting information on potential changes inrates. The banks also help their clients manage positions andmove funds.In addition to the OTC market, there are a number of ex-changes in which foreign-exchange instruments, mostly optionsand futures, are traded. Two of the best-known exchanges arethe Chicago Mercantile Exchange (CME) and the PhiladelphiaStock Exchange (PHLX). The CME offers futures and futuresoptions contracts (contracts that are options. on futurescontracts rather than options on foreign exchange per se) in theeuro, the Japanese yen, the Mexican peso, the Australian dollar,the British pound, the Canadian dollar, the Swiss franc, theBrazilian real, the South African rand, the New Zealand dollar,the Swedish krona, the Norwegian krone, and the Russianruble. The CME hit record trading levels for futures contracts in2002-with June and July the busiest months in history. Whenthe economy turned down, investors flocked to the CME topurchase options in a move to hedge against falling portfolios.Also, electronic trading increased the ease and availability of trading.The Philadelphia Stock Exchange is the only exchange in theUnited States that trades foreign-currency options. The PHLXlists six dollar-based standardized currency option contracts:Australian dollars, British pounds, Canadian dollars, euros,Japanese yen, and Swiss Frances. The PHLX has been growingfaster than the CME. Much of the growth has come fromMNEs. Although options cost more than futures, big compa-nies prefer them to futures (the CME instrument) because of their greater flexibility and convenience.

Case Study

Foreign Travels, Foreign-Exchange Travails: Excerpts from theTravel Journal of Lee Radebaugh. One of the more dauntingaspects of overseas travel for the business executive or thetourist is coping with currency. Recently, I traveled to LatinAmerica to visit alumni, interview candidates for our MBAprogram, and set up a foreign business excursion for graduatebusiness students. I was in such a hurry to leave that I didn’teven check the exchange rates in the Wall Street Journal-something I usually do. Even though the exchange rates in theJournal are the New York selling rates (my buying rates) fortransactions of $1 million or more –and I didn’t plan onexchanging $1 million-I could still have gotten a general idea of what to expect.The first stop was Chile. I decided to carry a mixture of cashand traveler’s checks, because on a trip to Brazil a new yearsearlier, I was attacked and nearly robbed in Rio de Janeiro.Traveler’s checks provide security because they can be replaced.However, in that prior trip, the bank wouldn’t cash traveler’schecks at the Buenos Aires airport, so this time I came preparedfor all possibilities. In addition, I like to use credit cards, as longas the local currency is stable. Credit card companies handle largevolumes of currency daily, so they get favorable exchange rates.When we cleared customs in Chile, the exchange rate was 350pesos per dollar, I had no idea whether hotel, I asked thewoman at the front desk if she could cash $100, and she saidshe was out of pesos but would have some in 30 minutes.This was no big deal because we needed to unpack and restbefore having lunch. After a nap, we headed down to the frontdesk to get some cash. But still the answer was, “sorry, nopesos.” She did suggest an exchange house two blocks away. Sooff we headed. After getting lost, we finally asked directions andfound a casa de cambio (Exchange House) next to the metro(subway or underground). To our pleasant surprise, theexchange rate was 450 pesos per dollar, and there was no servicecharge. Usually, when you convert currency at the airport, bank,or hotel, you have to pay a service charge on each transaction.We walked out of the Case de cambio with 45,000 pesos-10,000more than if we had converted at the airport.As we walked to lunch, I began to figure 8.5 out how muchthings would cost. When I get foreign currency, I feel as if I’mspending Monopoly money-it just doesn’t seem real for somereason. “Let’s see, if I want to pay $ 10 for lunch, I Should pay4,500 pesos ($10X450 pesos, the exchange rate I got when Itraded my dollars into pesos). That’s easy. But if lunch costs7,800 pesos? How much is that? Never mind. It’s more than$10 and less than $20 (between 4,500 and 9,000 pesos).” I saidto myself that I might have to think about this some more.After two wonderful days in Santiago, we checked out of thehotel-an experience in itself. Everyone was very pleasant, but thesystem was a little slow. The clerk said, “Do you want to keepthe charges on your American Express?” “Of course,” I said. Ifigured American Express could get a pretty good exchange ratefor my room charge for two nights of 102,000 pesos. “That willbe $255,” he said. “Wait,” I said. “What exchange rate are youusing?” “Four hundred pesos,” he replied. “That’s a horriblerate,” I said. “I got 450 pesos down the street.” “That is notpossible, Senor. Maybe you misunderstood. Perhaps 405, ormaybe 415, but not 450.” “I know what exchange rate I got andit was 450,” I replied. “That is a very good exchange rate,Senor.” Yeah, right, I thought. Not only did I not get theAmerican Express rate, but the room cost me $127.50 pernight! At my conversion rate of 450 pesos from the Casa deCambio, I would have spent only $227 for two nights (102,000pesos/450 pesos), thus saving $28.MAP. A Trip Through South America’s Exchange RatesIt wasn’t enough to cause an international incident, however, soI dropped it and thanked him for the lovely stay. I may be back,SO” didn’t want him to remember an ugly American.