Foreign Currency and Foreign Exchange
As per Foreign Exchange Act, (Section 2), 1947.
Currency" means any currency other than
Exchange" means includes any instrument
drawn, accepted, made or issued under clause (8) of
section 17 of the Banking Regulation Act, 1956, all deposits,
credits and balance payable in any foreign currency, and
any drafts, traveler’s cheques, letters of credit and bills of
exchange, expressed or drawn in Indian currency but
payable in any foreign currency;
The foreign exchange market is a global, worldwidedecentralized 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.
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
FEATURES OF FOREIGN EXCHANGE
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 telecommunications like telex, telephone and internet. The
leading foreign exchange market in India is Mumbai.
Calcutta, Chennai and Delhi are other centre's
accounting for bulk of the exchange dealings in India.
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.
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.
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
What is an Exchange Rate ?
Exchange Rate is the price of one country's
currency expressed in another country's
currency. In other words, the rate at which one
currency can be exchanged for another.
e.g. Rs. 50 per one USD
Major currencies of the World
What is a Foreign Exchange
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
PARTICIPANTS IN THE FOREIGN
All Scheduled Commercial Banks
(Authorized Dealers only).
Reserve Bank of India (RBI).
Inter Bank Brokerage Houses.
Components of a Standard
‘Dealt’ or ‘Variable’ Currency
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).