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Foreign Currency and Foreign ExchangeAs per Foreign Exchange Act, (Section 2), 1947."Foreign Currency" means any currency other thanIndian currency;"Foreign Exchange" means includes any instrumentdrawn, accepted, made or issued under clause (8) ofsection 17 of the Banking Regulation Act, 1956, all deposits,credits and balance payable in any foreign currency, andany drafts, traveler’s cheques, letters of credit and bills ofexchange, expressed or drawn in Indian currency butpayable in any foreign currency;
INTRODUTION The foreign exchange market is a global, worldwide- decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies. The foreign exchange market assists international trade and investment by enabling currency conversion. For example, it permits a business in the United States to import goods from the European Union member states especially Euro zone members and pay Euros, even though its income is in United States dollars. 3
Foreign Exchange Market Foreign exchange market refers to the market in which participants are able to buy, sell, exchange and speculate on currencies. Foreign exchange markets are made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail foreign exchange brokers and investors. The foreign exchange market is considered to be the largest financial market in the world. 4
FEATURES OF FOREIGN EXCHANGE MARKET LOCATION- foreign exchange market is described as an OTC ( over the counter ) market as there is no physical place where the participants meet to execute the deals. It is more an informal arrangement among the banks and brokers operating in a financial centre purchasing and selling currencies, connected to each other by tele- communications like telex, telephone and internet. The leading foreign exchange market in India is Mumbai. Calcutta, Chennai and Delhi are other centres accounting for bulk of the exchange dealings in India. 5
SIZE OF MARKET Foreign exchange market is the largest financial market with daily turnover of over USD 3.21 trillion. The largest foreign exchange market is London, followed by New York, Tokyo, Zurich and Frankfurt. 6
24 HOURS MARKET The markets are situated throughout the different time zones of the globe in such a way that when one market is closing the other is beginning its operations. Thus at any point of time one market is closing the other is open. 7
PHYSICAL MARKETS In few centre’s like Paris and Brussels, Foreign exchange business takes place at a fixed place, such as the local stock exchange buildings. At these physical markets, the banks meet and in the presence of the representative of central bank and on the basis of bargains. 8
What is an Exchange Rate ?Exchange Rate is the price of one countryscurrency expressed in another countryscurrency. In other words, the rate at which onecurrency can be exchanged for another.e.g. Rs. 50 per one USDMajor currencies of the WorldUSDEUROYENPOUND STERLING
What is a Foreign Exchange Transaction ? Any financial transaction that involves more than one currency is a foreign exchange transaction. Most important characteristic of a foreign exchange transaction is that it involves Foreign Exchange Risk.
PARTICIPANTS IN THE FOREIGN EXCHANGE MARKET All Scheduled Commercial Banks (Authorized Dealers only). Reserve Bank of India (RBI). Corporate Treasuries. Public Sector/Government. Inter Bank Brokerage Houses. Resident Indians Non Residents Exchange Companies Money Changers
Components of a Standard FX Transaction Base Currency (USD/INR) ‘Dealt’ or ‘Variable’ Currency Exchange Rate Amount Deal Date Value Date Settlement Instructions
Foreign exchange transactions are settled through Nostro and Vostro accounts. Nostro : our account with banks abroad. Reserve Bank of India (RBI) maintains various Nostro accounts in a number of countries. Vostro : their account with us. Many multilateral agencies (e.g. IMF, World Bank) maintain their Nostro accounts at Reserve Bank of India (RBI).