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Non- deliverable forwards
Reasons for executing NDF
Summary
Introduction
History
Market Size and Liquidity
Financial instruments
Speculation
Features of FX market
Why people choose FX market
Market Participants
Interest rate party
Party conditions
Violation of IRP
Introduction
Foreign exchange market are that market which exchange of one currency for another currency
Individuals, firms and banks
With the help of telecommunication
Every single currency
Foreign currency for other currency
Most liquid financial market
24 hours market
No centralized location
Large and most liquid market
Speculation, hedging and arbitrage
Quote driven market
24 hours market
FEATURES OF FX MARKET
WHY PEOPLE CHOOSE FX MARKET
Large volume trading
Easy of entry
High chance of profit
24 hours market
Low fees cost
Market participants SPOT MARKET
Commercial banks
Brokers
Customers of commercial and central bank
Corporations/ companies international
FORWARD MARKET
Arbitrageurs
Traders
Hedgers
Speculators
Market participants
History of Foreign Exchange Market
4th century
Medieval and later15th century
the Medici family
1704
agents
Kingdom of EnglandCounty of Holland
Early modern
Modern to post-modern
WWII - Markets close - After 1973
Market Size and Liquidity
Main foreign exchange market turnover, 1988–2007, measured in billions of USD.
Bank for International Settlements outright forwards, swaps and other derivatives
1998 - $1.7 trillion 2010 - US$3.98 trillion April 2013
United Kingdom - 36.7% United States - 7.9%
Japan - 6.2%.
Singapore surpassed Japan $383 billion per day
United Kingdom (41%)United States (19%)Singapore (5.7)%Japan (5.6%) Hong Kong (4.1%)
Financial instruments
Spot
Forward
Swap
Futures
Option
TOMM
NDF
Cash
No arbitrage condition
forward exchange and spot exchange rate
Expected rate of change = interest rate of the exchange rate differential
INTEREST RATE PARITY
RATE OF RETURN IN LOCAL CURRENCY
= RATE OF RETURN IN FOREIGN CURRENCY
MATHEMATICALLY
If IRP is violated, then an arbitrage opportunity
exists.
VOILATION OF iRP
Cash-settled , short term
forward contract.
NDF market is an OTC market.
Contract traded on non-
convertible foreign
currency
NON DELIVERABLE FORWARDS
Calculated by taking the difference between
exchange rate and spot rate
Typically quoted with the USD as the reference currency, and the settlement amount is also in USD.
Speculation
Hedging
REASONS FOR EXECUTING NDF
CONCLUSION
Aniket Waje
Wilona Tuscano Amee Rathod
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