Foreign exchange-market-1230373682311454-2-120904130014-phpapp02
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  • 1. Foreign Exchange MarketForeign Exchange Market MechanismMechanism Harwinder singhHarwinder singh MBA- 1MBA- 1stst Sem 2Sem 2ndnd
  • 2. As per Foreign Exchange Act, (Section 2), 1947.As per Foreign Exchange Act, (Section 2), 1947. "Foreign Currency""Foreign Currency" means any currency other thanmeans any currency other than Indian currency;Indian currency; "Foreign Exchange""Foreign Exchange" means includes any instrumentmeans includes any instrument drawn, accepted, made or issued under clause (8) ofdrawn, accepted, made or issued under clause (8) of section 17 of the Banking Regulation Act, 1956, all deposits,section 17 of the Banking Regulation Act, 1956, all deposits, credits and balance payable in any foreign currency, andcredits and balance payable in any foreign currency, and any drafts, traveler’s cheques, letters of credit and bills ofany drafts, traveler’s cheques, letters of credit and bills of exchange, expressed or drawn in Indian currency butexchange, expressed or drawn in Indian currency but payable in any foreign currency;payable in any foreign currency; Foreign Currency and Foreign ExchangeForeign Currency and Foreign Exchange
  • 3. 3 INTRODUTIONINTRODUTION  The foreign exchange market is a global, worldwide-The foreign exchange market is a global, worldwide- decentralized financial market for trading currencies.decentralized financial market for trading currencies. Financial centers around the world function as anchorsFinancial centers around the world function as anchors of trading between a wide range of different types ofof trading between a wide range of different types of buyers and sellers around the clock, with the exceptionbuyers and sellers around the clock, with the exception of weekends. The foreign exchange market determinesof weekends. The foreign exchange market determines the relative values of different currencies. The foreignthe relative values of different currencies. The foreign exchange market assists international trade andexchange market assists international trade and investment by enabling currency conversion. Forinvestment by enabling currency conversion. For example, it permits a business in the United States toexample, it permits a business in the United States to import goods from the European Union member statesimport goods from the European Union member states especially Euro zone members and pay Euros, evenespecially Euro zone members and pay Euros, even though its income is in United States dollars.though its income is in United States dollars.
  • 4. 4 Foreign Exchange MarketForeign Exchange Market  Foreign exchange market refers to the market inForeign exchange market refers to the market in which participants are able to buy, sell,which participants are able to buy, sell, exchange and speculate on currencies. Foreignexchange and speculate on currencies. Foreign exchange markets are made up of banks,exchange markets are made up of banks, commercial companies, central banks,commercial companies, central banks, investment management firms, hedge funds,investment management firms, hedge funds, and retail foreign exchange brokers andand retail foreign exchange brokers and investors. The foreign exchange market isinvestors. The foreign exchange market is considered to be the largest financial market inconsidered to be the largest financial market in the world.the world.
  • 5. 5 FEATURES OF FOREIGN EXCHANGEFEATURES OF FOREIGN EXCHANGE MARKETMARKET  LOCATION- foreign exchange market is described as anLOCATION- foreign exchange market is described as an OTC ( over the counter ) market as there is no physicalOTC ( over the counter ) market as there is no physical place where the participants meet to execute the deals.place where the participants meet to execute the deals. It is more an informal arrangement among the banks andIt is more an informal arrangement among the banks and brokers operating in a financial centre purchasing andbrokers operating in a financial centre purchasing and selling currencies, connected to each other by tele-selling currencies, connected to each other by tele- communications like telex, telephone and internet. Thecommunications like telex, telephone and internet. The leading foreign exchange market in India is Mumbai.leading foreign exchange market in India is Mumbai. Calcutta, Chennai and Delhi are other centre'sCalcutta, Chennai and Delhi are other centre's accounting for bulk of the exchange dealings in India.accounting for bulk of the exchange dealings in India.
  • 6. 6 SIZE OF MARKETSIZE OF MARKET  Foreign exchange market is the largest financial marketForeign exchange market is the largest financial market with daily turnover of over USD 3.21 trillion. The largestwith daily turnover of over USD 3.21 trillion. The largest foreign exchange market is London, followed by Newforeign exchange market is London, followed by New York, Tokyo, Zurich and Frankfurt.York, Tokyo, Zurich and Frankfurt.
  • 7. 7 24 HOURS MARKET24 HOURS MARKET  The markets are situated throughout the different timeThe markets are situated throughout the different time zones of the globe in such a way that when one marketzones of the globe in such a way that when one market is closing the other is beginning its operations. Thus atis closing the other is beginning its operations. Thus at any point of time one market is closing the other is open.any point of time one market is closing the other is open.
  • 8. 8 PHYSICAL MARKETSPHYSICAL MARKETS  In few centre’s like Paris and Brussels, ForeignIn few centre’s like Paris and Brussels, Foreign exchange business takes place at a fixed place, such asexchange business takes place at a fixed place, such as the local stock exchange buildings. At these physicalthe local stock exchange buildings. At these physical markets, the banks meet and in the presence of themarkets, the banks meet and in the presence of the representative of central bank and on the basis ofrepresentative of central bank and on the basis of bargains.bargains.
  • 9. Exchange Rate is the price of one country'sExchange Rate is the price of one country's currency expressed in another country'scurrency expressed in another country's currency. In other words, the rate at which onecurrency. In other words, the rate at which one currency can be exchanged for another.currency can be exchanged for another. e.g. Rs. 50 per one USDe.g. Rs. 50 per one USD Major currencies of the WorldMajor currencies of the World USDUSD EUROEURO YENYEN POUND STERLINGPOUND STERLING What is an Exchange Rate ?
  • 10. What is a Foreign ExchangeWhat is a Foreign Exchange Transaction ?Transaction ?  Any financial transaction that involves more thanAny financial transaction that involves more than one currency is a foreign exchange transaction.one currency is a foreign exchange transaction.  Most important characteristic of a foreignMost important characteristic of a foreign exchange transaction is that it involvesexchange transaction is that it involves ForeignForeign Exchange Risk.Exchange Risk.
  • 11. PARTICIPANTS IN THE FOREIGNPARTICIPANTS IN THE FOREIGN EXCHANGE MARKETEXCHANGE MARKET  All Scheduled Commercial BanksAll Scheduled Commercial Banks (Authorized Dealers only).(Authorized Dealers only).  Reserve Bank of India (RBI).Reserve Bank of India (RBI).  Corporate Treasuries.Corporate Treasuries.  Public Sector/Government.Public Sector/Government.  Inter Bank Brokerage Houses.Inter Bank Brokerage Houses.  Resident IndiansResident Indians  Non ResidentsNon Residents  Exchange CompaniesExchange Companies  Money ChangersMoney Changers
  • 12. Components of a StandardComponents of a Standard FX TransactionFX Transaction  Base CurrencyBase Currency (USD/INR)(USD/INR)  ‘‘Dealt’ or ‘Variable’ CurrencyDealt’ or ‘Variable’ Currency  Exchange RateExchange Rate  AmountAmount  Deal DateDeal Date  Value DateValue Date  Settlement InstructionsSettlement Instructions
  • 13.  Foreign exchange transactions are settled throughForeign exchange transactions are settled through NostroNostro andand VostroVostro accounts.accounts.  NostroNostro: our account with banks abroad. Reserve Bank: our account with banks abroad. Reserve Bank of India (RBI) maintains various Nostro accounts in aof India (RBI) maintains various Nostro accounts in a number of countries.number of countries.  VostroVostro: their account with us. Many multilateral: their account with us. Many multilateral agencies (e.g. IMF, World Bank) maintain their Nostroagencies (e.g. IMF, World Bank) maintain their Nostro accounts at Reserve Bank of India (RBI).accounts at Reserve Bank of India (RBI).
  • 14. 14 Thank YouThank You