FE&FRM - Unit I

FOREIGN
EXCHANGE &
FOREX RISK
MANAGEMENT
KMBNFM04
By:
Dr. Mohd Danish
FMS, SRGC
Foreign Exchange
• Foreign exchange, or forex, is the

conversion of one country's currency into
another.
• Foreign exchange is handled globally

between banks and all transactions fall under
the auspice of the Bank for International
Settlements (BIS)
The Forex Market
• The foreign exchange market, commonly

referred to as the Forex or FX, is the global
marketplace for the trading of one nation's
currency for another.
• The forex market is the largest, most liquid

market in the world, with trillions of dollars
changing hands every day.
Process of Foreign
Exchange
• Foreign Exchange (FX) transactions involve one
party purchasing a quantity of one currency in
exchange for paying a quantity of another.
• When goods are traded across boundaries, the

selling and the buying firms prefer to
receive/pay consideration in a currency of their
choice.
Foreign Trade
• Foreign Trade is the exchange of goods and
services between two countries in the
international market.
• It helps in the availability of raw

material/finished product in a country that either
does not have it or has it in scarcity.
• The three types of foreign trade are as follows:
• Import.
• Export.
• Entrepot.
Exchange Rate
• The exchange rate is the price of one

currency in terms of the other. Currencies are
traded in the foreign exchange market. Like
any other market, when something is
exchanged there is a price.
Exchange Rate
• Currencies are traded in the foreign exchange
market. Like any other market, when something
is exchanged there is a price.
• In the foreign exchange market, a currency is

being bought and sold, and the price of that
currency is given in some other currency.
• That price is expressed as an exchange rate.

Foreign Exchange v/s Stock
• The forex or ‘foreign exchange market is a
marketplace in which currencies can be bought,
sold, and exchanged. The participants in this
market range from banks, individual retail
traders, and even travelers in need of local
currency.
• The stock market is a collection of exchanges that

trade various stocks in different companies.
Shares can be bought and sold to others via this
network of exchanges (similarly to buying and
selling currencies).
Foreign Exchange v/s Stock
• The price at which the market participants buy or
sell currencies is determined by their exchange rate,
which is the value of one currency in terms of
another.
• For example, the Euro is worth 1.21 U.S. Dollars,

meaning it takes $1.21 to buy one Euro.
• Stock trading offers global shares like blue-chip

stocks and penny stocks and in a myriad of
industries from technology to automobile and more.
Balance of Payment
• The balance of payments (BOP), also known

as the balance of international payments, is a
statement of all transactions made between
entities in one country and the rest of the
world over a defined period, such as a quarter
or a year.
Balance of Payment
• The balance of payments (BOP) is the record

of all international financial transactions made
by the residents of a country.
• There are three main categories of the BOP:

the current account, the capital account, and
the financial account.
Balance of Payment
• The current account is used to mark the inflow
and outflow of goods and services into a country.
• The capital account is where all international
capital transfers are recorded.
• In the financial account, international monetary
flows related to investment in business, real
estate, bonds, and stocks are documented.
• The current account should be balanced versus
the combined capital and financial accounts,
leaving the BOP at zero, but this rarely occurs.
International Exchange System
International payment and exchange,
respectively, any payment made by one
country to another and the market in which
national currencies are bought and sold by
those who require them for such payments.
Types of International Exchange
Rate System
• Exchange rate is the value of another country's
currency compared to that of your own.
• If you are traveling to another country, you need to
"buy" the local currency. Just like the price of any
asset, the exchange rate is the price at which you can
buy that currency.
• If you are traveling to Egypt, for example, and the
exchange rate for U.S. dollars is 1:5.5 Egyptian
pounds, this means that for every U.S. dollar, you can
buy five and a half Egyptian pounds.
Types of International Exchange Rate
System
Fixed exchange rates mean that two

currencies will always be exchanged at the
same price while floating exchange rates mean
that the prices between each currency can
change depending on market factors; primarily
supply and demand.
Fixed Exchange Rates
• A fixed, or pegged, rate is a rate the
government (central bank) sets and maintains
as the official exchange rate.
• A set price will be determined against a major

world currency (usually the U.S. dollar, but
also other major currencies such as the euro,
the yen, or a basket of currencies).
Floating Exchange Rate
• Unlike the fixed rate, a floating exchange rate

is determined by the private market through
supply and demand.
• A floating rate is often termed "self-
correcting," as any differences in supply and
demand will automatically be corrected in the
market.
Fixed Rate v/s Floating Rate
• In reality, no currency is wholly fixed or

floating. In a fixed regime, market pressures
can also influence changes in the exchange
rate.
• A central bank will often then be forced to
revalue or devalue the official rate so that the
rate is in line with the unofficial one, thereby
halting the activity of the illegal market.
IMF
The IMF is a global
organization that works to
achieve sustainable growth
and prosperity for all of its
190 member countries. It
does so by supporting
economic policies that
promote financial stability
and monetary cooperation,
which are essential to
increase productivity, job
creation, and economic
well-being.

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FOREIGN

• Foreign exchange, or forex, is the

• Foreign exchange is handled globally

• The foreign exchange market, commonly

• The forex market is the largest, most liquid

• When goods are traded across boundaries, the

• It helps in the availability of raw

• The exchange rate is the price of one

• In the foreign exchange market, a currency is

• That price is expressed as an exchange rate.

• The stock market is a collection of exchanges that

• For example, the Euro is worth 1.21 U.S. Dollars,

• Stock trading offers global shares like blue-chip

• The balance of payments (BOP), also known

• The balance of payments (BOP) is the record

• There are three main categories of the BOP:

Fixed exchange rates mean that two

• A set price will be determined against a major

• Unlike the fixed rate, a floating exchange rate

• In reality, no currency is wholly fixed or

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