Foreign exchange is the mechanism by which
the currency of one country gets converted
into the currency of another country.
The conversion of currency is done by the
banks who deal in foreign exchange. These
banks maintain stocks of one currencies in the
form of balances with banks
WHAT IS FOREIGN EXCHANGE
It also refers to the stock of foreign currencies
and other foreign assets. The foreign exchange
management ACT 1999 defines “Foreign
exchange means foreign currency and
(a) Deposits credits and balances payable in any
(b) Draft traveler’s cheques, letter or credit or bills
of exchange expressed or drawn in Indian
currency but payable in any foreign currency.
(c) Drafts travelers cheques, letter of credit or bills
of exchange drawn by banks, institution or
persons outside India, but payable in Indian
Volatile, affected by hedger, arbitrager, speculator.
Affected by demand and supply.
Affected by rate of interest.
Affected by balance of payment surplus and deficit.
Affected inflation rate.
Spot and forward rates are different.
Affected by the economic stability of the country.
Affected by the fiscal policy of the government.
Affected by the political condition of the country.
It can be quoted directly or indirectly
Nature of foreign exchange
Foreign exchange market operates either as:-
Spot Market: (Current Market)
Spot market for foreign exchange is that market which handles
only spot transaction or current transactions.
Spot Market is of daily nature. It does not trade in future
Spot rate of exchange is that rate which happens to prevail at the
time when transactions are incurred.
Operation of foreign exchange market:
Forward Market for foreign exchange is that market which handles
such transaction of foreign exchange as are meant for future
It only caters to forward transaction.
It determines forward exchange rate at which forward transaction
are to be honored.
►Fixed Exchange Rate System
Fixed rates provide greater certainty for
exporters and importers.
►Flexible Exchange Rate System
Flexible exchange rate or floating exchange
rates change freely and are determined by
trading in the forex market.
Foreign exchange history can be viewed as a
series of solutions that allowed countries to
issue their own currency and to conduct their
own monetary policy while also allowing
international trade to be conducted by
providing a means of exchanging one
currency for another according to the
exchange rate between them, which was
either agreed-upon or set by the market.
History of Foreign exchange
A reliable forecast or future spot rate is called
study of empirical patterns of exchange rate
fluctuation. It provides essential information
for an exchange rate exposure.
Exchange rate fluctuations
►The foreign exchange market or forex market as it is
often called is the market in which currencies are
►Currency Trading is the world’s largest market
consisting of almost trillion in daily volumes and as
investors learn more and become more interested,
market continues to rapidly grow.
►All trades that take place in the foreign exchange
market involve the buying of one currency and the
selling of another currency simultaneously. This is
because the value of one currency is determined by its
comparison to another currency.
►The first currency of a currency pair is called the
“base currency,” while the second currency is called
the counter currency.
The Foreign Exchange Market for Beginners
►Foreign exchange Capital Markets (FXCM) is
an online currency trading firm that offers a
free demo account to traders who are new
and interested in the foreign exchange
►Registering for a demo account allows a
new trader to download the online trading
platform that is used by the company’s clients
trading live accounts and make trades as if
they were doing it with real money.
☻ Its huge trading volume representing the
largest asset class in the world leading to high
☻ Its geographical dispersion;
☻ Its continuous operation: 24 hours a day
except weekends, i.e., trading from 20:15
GMT on Sunday until 22:00 GMT Friday.
☻The use of leverage to enhance profit and
loss margins and with respect to account size.
Characteristics of foreign exchange
People may need to exchange currencies in
a number of situations.for Eg…
Fluctuations in exchange rates
A market based exchange rate will change
whenever the values of either of the two
component currencies change.
The higher a country's interest rates, the
greater will be the demand for that currency.
Retail Exchange Market
Central banks participate in the foreign exchange
market to align currencies to their economic
. Commercial companies often trade fairly small
amounts compared to those of banks or
speculators, and their trades often have little short
term impact on market rate.
National central banks play an important role in
the foreign exchange markets. They try to control
the money supply, inflation, and/or interest rates
and often have official or unofficial target rates
for their currencies.
Foreign Exchange Regulation Act (FERA),
1973 was replaced by the market friendly
Foreign Exchange Management Act (FEMA),
Money and Securities Markets set up by the
Reserve Bank in 1999 was expanded in 2004
to include foreign exchange markets
Measures Initiated to Develop the Foreign
Exchange Market in India
Foreign exchange market activity takes place
Many countries prohibiting onshore entities
from undertaking the operations in offshore
markets for their currencies. It is the central
bank, or professional dealers
association, which normally issues the code of
conduct (Canales-Kriljenko, 2004).In auction
markets, an auctioneer or auction
mechanism allocates foreign exchange by
matching supply and demand orders.
FOREIGN EXCHANGE MARKET STRUCTURE
► PLAN YOUR TRADE AND TRADE YOUR PLAN.
► THE TREND IS YOUR FRIEND.
►FOCUS ON CAPITAL PRESERVATION.
►KNOW WHEN TO CUT LOSS.
►TAKE PROFIT WHEN THE TRADE IS GOOD
►NOT TRADE BASED ON A TIP FROM A FRIEND
CURRENCY TRADING RULES
►Trading Out of Boredom or Anger
►Having Unrealistic Expectations.
►Taking Highly Correlated Trades.
►Failing to Use a Stop.
►Taking Unnecessary Risks.
►Being Too Patient With Losers and Not Patient
Enough With Winners.
►Being a “Possum Trader”.
Mistakes of Foreign exchange Traders