Exchange Rates and Currency Markets

Basics of Currency Markets

• Freely traded international currencies include USD, EUR, and JPY.
• The primary function of the foreign exchange market is to facilitate international trade and investment.
• Interest rate differentials have the most influence on exchange rate fluctuations.
• SEBI regulates the currency derivatives market in India.
• A floating exchange rate is determined by market forces without central bank intervention.
• Currency appreciation signifies an increase in a currency's value against another currency.
• A widening trade deficit in India can cause the INR to depreciate against the USD.
• A country with a strong trade surplus will likely experience an appreciating currency.
• A key function of the RBI in the forex market is managing India’s foreign exchange reserves.
• If the INR depreciates against the USD, Indian exporters benefit as their goods become cheaper for foreign buyers.
• An increase in India’s foreign exchange reserves generally indicates more exports than imports.
• Spot rate is best defined as the rate used for immediate delivery of currency.
• If a country’s inflation rate is higher relative to its trading partners, its currency is likely to depreciate in the long run.
• A favorable balance of payments situation generally leads to the strengthening of the domestic currency.
• Bid rate in the context of forex quotes is the rate at which the dealer buys foreign currency.
• The Consumer Price Index (CPI) macroeconomic indicator strongly affects currency values.
• High interest rates in a country typically lead to appreciation of that country’s currency.
• A "currency war" typically occurs when multiple countries try to depreciate their currencies to boost exports.
• A high current account deficit usually puts pressure on a currency to depreciate.
• The main advantage of a floating exchange rate system is the automatic correction of balance of payments.

Currency Futures & Options

• Key advantages of trading in currency futures are high liquidity and price transparency.
• The term "lot size" refers to the standardized quantity of currency in each contract.
• Currency options trading: option buyers pay a premium for the right but not the obligation.
• Time to expiry and volatility of the currency pair have the most impact on an option’s premium.
• A 'long position' in currency futures means the trader expects the currency to strengthen.
• In an options contract, the strike price is the predetermined price at which the currency can be bought or sold.
• 'Time decay' (theta) in option pricing means the erosion of option value as the expiry date approaches.
• A put option benefits the holder if the currency’s value falls below the strike price.
• Unlimited extension beyond expiry is not a typical feature of currency futures contracts.
• 'Open Interest' in futures trading best describes the total number of outstanding futures contracts that have not been settled.
• In currency futures, the daily settlement price is primarily used to calculate the margin calls for all open positions.
• A trader who expects low volatility in the USD/INR exchange rate could potentially sell a straddle.
• American-style currency options can be exercised at any time up to expiry.
• The clearing corporation’s role in futures trading is to guarantee trade settlement and reduce counterparty risk.
• SEBI, in consultation with stock exchanges, decides the contract specifications for currency futures in India.
• Margin requirements in currency futures trading are meant to cover potential losses and ensure financial integrity.
• An exporter who will receive USD in 3 months can hedge against INR appreciation by selling USD/INR futures.
• Central Government Ministries are not a direct participant in the currency futures market.

Forex Trading Strategies & Risk Management

• If a trader expects INR to depreciate against the USD, they should buy USD/INR futures.
• The primary purpose of stop-loss orders in forex trading is to limit potential losses.
• Scalping is a trading strategy that profits from small price fluctuations through multiple trades per day.
• A market order guarantees execution at the best available market price.
• Hedging in the currency market is best described as using derivatives to reduce or manage existing risk.
• A ‘carry trade’ strategy in forex involves borrowing in a low-interest currency and investing in a high-interest currency.
• An importer expecting to pay USD in 6 months would hedge against INR depreciation by buying USD/INR futures.
• The main advantage of using options over futures for hedging is that options give the holder the right but not the obligation to exercise.
• Exchange rate risk is a key risk in currency trading.
• Volatility in currency markets primarily affects the pricing of options premiums.
• A speculator anticipates USD/INR to rise sharply so they might buy USD/INR futures.
• If a trader wants to limit the downside risk without capping upside potential, they might buy a put option.
• Credit risk in currency derivatives is exemplified by the counterparty failing to fulfill the contract.
• A bullish harami or bullish engulfing pattern on the USD/INR chart suggests potential upward price movement.
• An overbought condition in technical analysis indicates the currency may be poised for a price correction.
• Strict stop-loss orders is the best measure to limit catastrophic losses in currency trading.
• A sudden rate hike by the US Federal Reserve would likely appreciate the USD. Using derivatives to hedge exposures is a risk management technique.
• Gamma in option Greeks measures the rate of change of delta with respect to changes in the underlying price.

Regulatory Framework & Compliance

• Monetary policy decisions are not regulated by SEBI.
• A clearing corporation in currency derivatives trading guarantees trade settlement and reduces counterparty risk.
• The penalty for insider trading in the forex market under SEBI regulations is criminal liability with financial penalties.
• A trader must sign a Client Agreement Form before opening a currency derivatives trading account.
• The Forward Markets Commission (FMC) in India oversees trading in commodities and derivatives.
• Currency futures are regulated under the SCRA (Securities Contracts Regulation Act), 1956
• AML/CFT compliance refers to Anti-Money Laundering / Combating the Financing of Terrorism.
• Suspicious or large cash transactions that raise red flags must be reported to FIU-IND by market participants.
• The Know Your Customer (KYC) process is designed to verify the identity and address of clients to prevent fraud.
• In case of a grievance with a currency derivatives broker, the first body to approach is the stock exchange’s investor grievance cell.
• A requirement for currency derivatives brokers under SEBI regulations is maintaining a minimum net worth prescribed by SEBI.
• If a client’s complaint is not resolved by the broker or stock exchange, the next step is to approach Securities Appellate Tribunal (SAT).
• NISM (National Institute of Securities Markets) is responsible for conducting certification exams for market participants.
• A key objective of SEBI in relation to derivatives is protecting the interests of investors in securities.
• A currency derivatives broker must segregate client funds from its own funds to protect client money from broker’s business risks.
• An AML alert might be triggered if a client engages in multiple high-value transactions with no clear economic purpose.
• The minimum net worth requirement for a stockbroker dealing in currency derivatives, as per SEBI norms, is approximately ₹1 crore.
• The Investor Protection Fund (IPF) is used to compensate eligible clients if a broker defaults.
• Insider trading in currency markets involves trading based on unpublished price-sensitive information.
• SEBI and the stock exchange can set position limits for currency derivatives trading in India.

Advanced Trading Strategies & Market Analysis

• The Relative Strength Index (RSI) technical analysis tool helps identify overbought and oversold conditions in forex trading.
• Best strategy to hedge against forex risk for an exporter receiving payments in USD is to sell USD futures.
• A rising wedge chart pattern in technical analysis generally indicates a potential bearish reversal.
• Fundamental analysis of currencies MOST closely evaluates economic indicators (GDP, CPI, interest rates).
• When using Bollinger Bands, bands contracting and price consolidating signals a potential breakout.
• A ‘long straddle’ strategy is best described as buying both a call and a put option with the same strike price and expiry.
• A major disadvantage of over-leveraging in currency trading is the increased risk of significant losses.
• An airline looking to hedge rising fuel costs in USD might buy USD futures to lock in USD rates for future fuel purchases.
• An example of arbitrage in forex is buying USD/INR on NSE and selling USD/INR on BSE at a higher price simultaneously.
• Delta in option Greeks measures the rate of change of the option’s price relative to the underlying currency’s price.
• A speculator might use during high volatility if they expect large price swings but are uncertain about direction using a long strangle or long straddle
• An “in-the-money” call option means the option’s strike price is below the current spot rate.
• If the RBI unexpectedly announces a reduction in the repo rate, the immediate impact on INR might be depreciation due to lower interest rates.
• A protective put strategy involves buying a put option while holding a long position in the underlying.
• Fiscal deficit analysis is NOT a technical analysis concept.
• “Theta” in options primarily measures time decay of the option’s value.
• A “reversal pattern” in technical analysis indicates a potential end of the current trend and start of an opposite trend.
• A currency carry trade is most profitable when the interest rate differential is large and the target currency does not depreciate significantly.
• A fundamental factor that could strengthen INR against USD is a significant increase in FDI inflows to India.
• Selling a straddle is the strategy is used to profit from a decreasing volatility environment.

Explore factors influencing exchange rates, including floating systems and trade surpluses. Learn about the RBI's role and hedging strategies. Analyze currency derivatives, technical analysis, and volatility strategies.