Foreign Exchange Market Analysis: Investor Perspectives Report

This report provides a comprehensive analysis of the foreign exchange market, covering its functions, trading time frames, and the theories of currency exchange rates. It delves into factors affecting the market, such as political stability and economic performance, while also addressing the risks and challenges associated with foreign trading, including exchange rate risk and interest rate risk. The report further explores various trading strategies like scalping, day trading, swing trading, and position trading, alongside the benefits and risks of 24-hour Forex trading. It examines risk reduction methods, questions the legitimacy of Forex, and discusses technical indicators and fundamental analysis. Overall, the report offers a detailed overview of the Forex market, providing valuable insights for investors and traders.

0ANALYSIS ON FOREIGN EXCHANGE MARKET
ANALYSIS ON FOREIGN EXCHANGE MARKET
Name of Student
Name of University
Author’s Note

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TABLE OF CONTENTS
FUNCTIONS OF FOREIGN EXCHANGE MARKET:................................................................4
Transfer Function:.......................................................................................................................5
Credit Function:...........................................................................................................................5
Hedging Function:.......................................................................................................................5
TRADING TIME FRAME:.............................................................................................................6
Scalping:......................................................................................................................................6
Day Trading:................................................................................................................................7
Swing Trading:............................................................................................................................7
Position Trading:.........................................................................................................................8
THEORIES OF CURRENCY EXCHANGE RATE:......................................................................8
Interest Rate Parity (IRP):...........................................................................................................8
Balance of Payments:................................................................................................................10
FACTORS AFFECTING THE FOREIGN EXCHANGE MARKET:.........................................11
Political Stability:......................................................................................................................12
Differentiation in Interest Rates:...............................................................................................12
Differentiation in Interest Rate:.................................................................................................12
Current Account Deficit:...........................................................................................................13
Economic Performance:.............................................................................................................13
RISKS AND CHALLENGES IN FOREIGN TRADING:...........................................................13

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Exchange Rate Risks:................................................................................................................13
Interest Rate Risk:......................................................................................................................14
Credit Risk:................................................................................................................................14
Replacement Risk:.....................................................................................................................15
Settlement Risks:.......................................................................................................................15
Country and Liquidity Risk:......................................................................................................16
Transactional Risk:....................................................................................................................16
BENEFITS OF FOREIGN EXCHANGE MARKET:..................................................................16
Flexibility in Trading:................................................................................................................17
Individual Control:.....................................................................................................................17
Practicing:..................................................................................................................................17
Transparency in Information:....................................................................................................18
Wide Options:............................................................................................................................18
Reasonable Cost:.......................................................................................................................18
Profitable Gains:........................................................................................................................19
High Liquidity:..........................................................................................................................19
No Involvement of Central Exchange:......................................................................................19
Volatility:...................................................................................................................................20
Works for 24 Hours:..................................................................................................................20
Confidence:................................................................................................................................20

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INVESTMENT STRATEGIES IN FOREX:................................................................................20
Daily or Weekly Trend Following:............................................................................................20
Carry Trading:...........................................................................................................................21
Day Trading:..............................................................................................................................21
Fundamental Trading:................................................................................................................21
BENEFITS AND RISKS OF 24-HOUR FOREX TRADING:.....................................................22
REDUCTION IN RISKS IN FOREIGN EXCHANGE MARKET:.............................................23
Is FOREX IS A SCAM?................................................................................................................23
TECHNICAL INDICATOR OF FOREIGN EXCHANGE MARKET:.......................................24
Simple Moving Average:...........................................................................................................25
Exponential Moving Average:...................................................................................................25
Moving Average Convergence and Divergence:.......................................................................25
The Bollinger Band:..................................................................................................................25
FUNDAMENTAL ANALYSIS:...................................................................................................26
CHAPTER SUMMARY:..............................................................................................................27
REFRENCES:................................................................................................................................29

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FUNCTIONS OF FOREIGN EXCHANGE MARKET:
According to Kindle-Berger, foreign exchange market can be termed as the place where
the transactions are conducted on the basis of real currency. Foreign exchange can be
seen as the institutional arrangement which is used for the purpose of selling or buying of
currency residing from different countries of the world (Chaboud et al 2014). The seller
selling in the foreign exchange market is termed as the exporter. The one who buys the
currency in the foreign exchange market are termed as the importer. The foreign
exchange market is the part of the money market of the world. Both importer and
exporter claims on foreign exchange market and intermediaries who are present in the
market arrange for the sell. Importer, exporter and the intermediaries altogether constitute
the foreign exchange market. Unlike share market which is present in the geographical
map foreign exchange market does not have any such existence. Moreover it does not
belong to any specific market rather foreign exchange market comes into existence
wherever there is an interchanging in the currency which resides from the different
countries of the world. The existence of foreign exchange market united in a single
market. Abundance amount of broker are present in the foreign exchange market. Banks
is the biggest dealer among all in the foreign exchange market. The responsible
institutions are the one who provides the exchange bank stated all over the world. Bill
broker are the types of dealer present in the foreign exchange market. Bill brokers bring
buyers and sellers together. Acceptance houses are also one of the important dealers in
the foreign exchange market. The central bank of the country happens to be the parts of
the foreign exchange market. The important functions of the foreign exchange market are
provided below:

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The transfer of power of purchasing from one country to another country made through foreign
bills or the telegraphic bills.
Provide credit for the international trade is also the important functions on the foreign exchange
market. It also provides selling and buying spot or forward contract for foreign exchange market.
Transfer Function:
The function of the foreign exchange market includes the transmission of the currencies
to other currencies. The transfer is made by sending the purchasing power from one individual,
to another. This deportation of purchasing power is done by the variety of credit instruments
such as telegraphic transfers, bank draft and foreign bills. The payment method is very similar to
domestic clearings. The payment method consists of paying the debts on either side.
Credit Function:
The credit function of the company is an important function of the foreign exchange
market. Foreign exchange contributes credit to the national and international exporter and
importer. The foreign exchange functions of the credit function helps to encourage foreign trade.
3 months required as the maturity period.
Hedging Function:
The most important function of the foreign exchange market is the hedging function. The
hedging function includes hedging the risks which are attached with the foreign exchange
market. This is done to keep up the profit or loss factor which is associated with the transfer of
the currency in the foreign exchange market. A firm or an individual takes a huge risks if they
doing the business in the foreign exchange market. To reduce such risks the firm or an individual
opts for hedging. Hedging is made by the forward contracts. A forward contract helps to sell or

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buy foreign exchange against different currency at some date in the future after fixating the price
for the future. This might proves to be two sided sword because if the price increases more than
the fixated price then the firm or the individual will face the loss in the fixated date in the future.
TRADING TIME FRAME:
The time frame is the time during which the transactions and all the transactions
in the foreign exchange are done irrespective of nations in the world. The time frame depends of
the individual or the firm who wants to enter into the foreign exchange market for trading. The
time frame takes place maybe in weekly or daily. Time frame helps the company to spread less
in a single transactions made in the foreign exchange market. The transactions in the foreign
exchange market can either be short term trading or long term trading. The time frame for the
short term trading is much less rather than the long term trading. In the case of the long term
trading, the firm or the individual need to wait patiently for a longer period of time. The bigger
account is also a criteria for the long term trading otherwise there is a chance for getting margin
calls. In the case of short term trading the interested person is mainly depends on the intra-day
trading where trading is done within the time limit of 15 minutes (Van Hout and Bingham 2014).
This will help the trader to avoid the risks which might rise up overnight. Swing trading is also
used for the sdhort term trading as the trading is done within few hours.
Scalping:
Scalping is the important strategies in the foreign exchange market of the world. This
trading strategy helps to gain the profit from little bit deviation in the proce of the currency or the
stock price. The traders who depend on the strategy differentiation have plans from 10 to few
hundreds of trading in an individual day. This strategy of scalping in the foreign exchange

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market backed by the belief that the opted small moves in the stock price are easy to track and
hold and catch rather than big ones. The traders who thought of implementing this kind of
strategy mainly called as the scalpers. The small profits will turn up into a big amount. This is
also used for avoiding the loss stacked with the foreign exchange market. This done before the
market session is closed but in the case of the foreign exchange market the trasnsactions may
occur any time of the day.
Day Trading:
Day trading can be termed as the trading strategy which involves opening and closing
positions are adopted in a single day. Day trading can be acquired for the purpose of the short
term trading which intends to gain profit with a small deviation in the price of the stock or the
currency value in the foreign exchange market. The day trader mainly focuses on the price of the
asset rather than the potential associated with the currency in the long term. The day trading is
basically focuses on the technical analysis and it also wants the trader to up to date with the
foreign exchange market as it can be changed in a regular basis.
Swing Trading:
Swing trading which also accepted as the trading happens in the trading of the short term
trading. These are a kind of strategy where it buys or sell the currency under few days or few
weeks. Swing traders mainly use technical analysis as it has a very short period of time. The
traders who opts for the swing traders mainly utilizes fundamental analysis in addition to
analyzing price trends and also the pattern which is followed during the trading in the foreign
exchange market.

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Position Trading:
Position trading is used for the long term trading. Position trading includes the holding of
the stock for a longer period of time. The single day deviation in the price of the currency in a
single day does not cause any change in the strategy as they does not believe in such small
change. The trader who follows the strategy of the position trading mainly depends on the
general market trends and also the historical pattern in a long term. Using both the technical and
fundamental analysis the trader needs huge time as the trader has to consider the factor for a
considerable time which takes a huge time as the data is huge and it needs to be checked
minutely. The common tool which the trader who follows the position trading needs to
concentrate on the analytical technique based on the 200 day trading.
THEORIES OF CURRENCY EXCHANGE RATE:
In accordance to the currency exchange rate there are duo types of exchange rate on
currency are as follows:
Interest Rate Parity (IRP):
Interest rate parity can be termed as the theory where the interest rate between the
countries is different which is totally similar to the differentiation in the exchange rate between
the forward exchange rate and also the spot exchange rate. Interest rate parity plays a huge role
in the case of the foreign exchange market which also connects the interest rates between the
countries, spot exchange markets, connecting interest rates and also the foreign exchange rates.
Interest rate parity can be formulated in terms of the mathematical approach. They can be
explained below:

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F0=S0∗
( 1+ic
1+ib )
Where:
F0= Forward Rate
S0=Spot Rate
ic = Interest Rate of the country c
ib= Interest rate in country b
To calculate the foreign exchange rate for currency are being used. The foreign exchange rates
are the rates for a future point in time which is opposite to the spot exchange rate which also
termed as the current rates. The arbitrage is one of the important tools which are present in the
foreign exchange market and hence it is also the part of the interest rate parity. Arbitrage can be
explained in terms of the simultaneous purchase of the currency and selling of the currency from
the difference in the price. The time ranging of the forward rates constitute from a single week to
the five years and maybe beyond. In the currency trade forwards are termed as the bid ask
spread. The difference which arises from the forward rate and spot rate is termed as the swap
points. If the spot rate is positive then it is known as the forward premium and if it is negative
then it is known as the forward discount. Forward rates can be availed from the banks and the
dealers depending on the period of the rate. Interest rate parity mainly explains the hedge returns
which come after the investment made in the foreign exchange market. The return must be same
irrespective of the level of the interest rates. When there is no presence of the arbitrage and it
satisfies the use of the forward contracts which is used for reducing the risk which happens to be
attached with the foreign exchange market then the interest rate parity is known as covered

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interest arte parity. On the other hand interest rate parity is a said to be uncovered as the no
arbitrage is used and there is no effect on the forward contracts which is associated with the
foreign exchange risks.
For example, American Treasury bills are providing the annual interest rate of 1.75%
while on the other hand UK is offering the interest rate of 0.50%. If any investor wants to take
any kind of advantage of the difference in the interest rate then he will transfer the certain
amount of U.S. dollar into U.K. pound to purchase Treasury bills of U.K. Then the investor has
to send the forward contract of U.S. dollar for one year.
Interest rate parity has some certain limitations. This limitation comes under the purview
of the assumptions which comes with it. For example in case of covered interest rate parity there
is an assumption of having funds with infinite number that are used for arbitrage. In the case of
the uncovered interest rate parity there cannot be any forward contracts so no-hedging available
so uncovered interest rate parity does not contain any ground.
Balance of Payments:
Balance of payments is the amount which is a sum up of all transactions made by
a country, or a government or an institution of a particular country or a company of a particular
country which competes with the other country, company or the government. The balance of
payments sometimes also considered as the balance of international payments. The transactions
which are considered as the transactions in balance of payments or balance of the international
payments contain imports and exports of goods and services and also the amount of capital. The
transactions also include transfer payments such as aid from foreign and remittances. The
balance of payments also includes the net international investment position from the transactions

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which are to be considered. Both balance of payments and net international investment position
altogether taken into account as international account. The balance of payments of a country are
segregated into two accounts namely capital account and current account. Under the purview of
the balance of payments this capital account also called financial account having a small amount
of capital. This capital account financial account of the balance of payments is listed separately
in the account. The capital account also contains the transactions made in the financial
instruments and central bank reserves. On the other hand the transactions related with
investment, goods and services, current transfers and the investments made in that year are falls
under the current account part of the balance of payments. The calculations of current account
contain the national output of a country. According to the calculations of the balance of
payments the output must be null. The reason behind the null value in the balance of payments is
that credit which is going out must be compensated with the debit which comes in or vice-versa.
Here, exports are considered as the credit and import of an item is considered as the debit in an
account. If specific country cannot fund the import then the country must use pits reserve to
bring down the reserves. The above mentioned situations also named as the balance of payments
deficit. In theory the balance of payments is possible as it comes to zero but in reality due to the
problem in searching the exact data and counting the comparison between the economy and the
rest of the world will be not possible. Balance of Payments data is also an member for
calculating the national and international economic policy. The usage of the balance of payments
like payments imbalances and foreign direct investment are the data which is required for
nation’s policymakers which seek to address. On the contrary economic policies which are
targeted by the objectives affect the balance of payments. Inspire of having the nation’s balance
of payments result zero still there is a difference prevails between the countries balance of