The Forex (Foreign Exchange) market is undisputedly the largest and the fastest growing market in the world. With an average daily volume/turnover of around $ 4.0 Trillion, the Forex Market is larger than GDP of Great Britain. Predominantly it mainly consists of Inter-Bank transactions, but after 1995, it has become more accessible to retail traders with the advent of Internet and several Forex Brokers, Worldwide. Each passing day, thousands of traders join the Forex Market with the intent of making profits, when the exchange rates of currency pairs fluctuate. The International Forex Spot Market is available to trade 24 hours from Sunday, 3:00 PM EST through Friday, 4:00 PM EST. It can be categorised into mainly 3 trading sessions: Asia (Sydney, Singapore, China, Japan, India…), Europe (U.K, Germany, France…) and New York. The Spot Forex Market is de-centralized in operations with different regulations across a region or country.
Currency trading is done in pairs. The quote EUR/USD=1.2450 means: “One Unit of Euro is equal to 1.2450 USD”. Here, Euro is the Primary and USD is the Secondary currency, while 1.2450 is the exchange rate. There are two rates offered to traders, Bid (to buy) and ask (to sell). The difference between Bid and Ask is termed as Spread.
PIP (Percentage In Point) is termed as the smallest possible movement in the Currency Market. For example, if EUR/USD moves from 1.2450 to 1.2550, Euro is said to have appreciated by 100 pips. Traders are busy trying to accumulate pips, which is directly proportional to revenues according to the quantity/volume traded.
Currency trading is done in lots, and the size depends on the type of account opened. There are different lot sizes available $1000, $10000 and $100000 to trade and margin required is from 0.25% to 1% of the lot size (which is the least as compared to Equity and Commodity Markets).
According to Feb 21, 2011 amendment of The Liberalized Remittance Scheme of the Reserve Bank Of India, a resident individual can invest equivalent of up to $200000.00 (now reduced to $75000.00), outside India; but margin remittances (made to overseas Forex Brokers) or third parties has been restricted. Since the Indian Rupee is still Non-floating, it is not freely tradable in the International Spot Forex Market. But traders can still participate in the local currency derivates segment, and derive benefits from the Foreign Exchange Rates.
Major Factors that Affect the Forex Markets:
Every week there are several economic data released, that affect Exchange Rates. A few important ones are Interest Rate Decisions by Central Bankers, Unemployment Rates, GDP, Consumer Confidence, Jobless Claims, and Non-Farm Payrolls etc.
Forex Markets in India:
Under the guidelines of RBI, The Securities Exchange Board of India (SEBI), laid down a road map and launched Exchange Traded Currency Derivatives in Aug-Sep 2008. The first pair launched was USD/INR and a year after; EUR/INR, GBP/INR and JPY/INR were added. The volume and growth story has been from 500 Cr per day in the first month of launch to approx. 55,000-60,000 Cr each day. As of now, the Currency Derivates are offered by MCX-SX, NSE, BSE and United Stock Exchange.
Currency Derivatives are traded in lot size of minimum USD 1000.00. A margin of 2-3% (of the lot size, i.e. INR 1200 to INR 1800), is required to be deposited per lot traded. The minimum movement in the currency derivative segment is termed as a TICK, and it value is INR 2.50. For example, if a trader bought 1 lot of USD/INR at 61.0000 and sold the same at 62.0000, he/she made a gross profit of INR 1000.00.
Who Could Participate?
The currency derivative segment was primarily launched, to offer ease and transparency to the Exporters and Importers to hedge themselves against their underlying exposures/risk. An EXIM company can easily open an account with an underlying broker and hedge up to 12 months of their underlying currency exposure on the trading terminal online by depositing 2-3% as margin, per $1000.00. Of course, the time period, margin and other costs should be taken into consideration. Individual traders can also participate in this segment, just to derive benefits from the exchange rate fluctuations.
Reasons to participate:
Currency trading is one of the most liquid asset classes with international volumes touching $4.0 trillion. The local currency derivative segment growth story has been very impressive; from 500 Cr to approx 60,000 Cr per day, in 5 years; and this is just the beginning. Furthermore, the currency markets move in tandem with major economic data released worldwide, making it a country specific rather than a company specific asset unlike the equity segments. Once the Indian rupee is turned floating (freely tradable), even the Spot Markets would take off in a big way, with all major Forex Brokerage Houses Worldwide eyeing India as a major Asian player. Growth story of the next decade in India could easily be the Currency Segment!!