Transcript of "Forexmanagement 121117052946-phpapp02"
Definition:- “Foreign exchange means foreign currency
and it includes:
a) i) all deposits,credits and balances payable in
ii) The drafts,traveller’s cheque,letters of credit and
bills of exchange expressed or drawn in Indian
currency but payable in any foreign currency.
b) All the instruments payable at the option of the
drawee or the holder there of or any other party
there to either in Indian currency or in foreign
currency or partly in one and partly in other.” –
Foreign Exchange Regulation Act.
FOREIGN EXCHANGE MARKETS
“ Foreign exchange market is a market in which foreign currencies are bought
“Foreign exchange market is a system facilitating mechanism through which
one countries currencies can be exchanged for the currencies of another
Nature of Foreign Exchange Market:-
OVER THE COUNTER MARKET
AROUND THE CLOCK MARKET
BANKS ARE INVOLVED IN 95% CASES.
1-2% transactions are for actual transaction rest for speculation.
Money and near money instruments are denominated in foreign currency is
There is no physical transfer of money it is online.
Foreign exchange is a system of private banks,financial banks,foreign
exchange dealers and central banks through which individuals,business and
government trade,foreign exchange or other nation’s currency.
Exit in the network of information system.
A party can never be a demander of one currency without being
simultaneously a supplier of another.
FOREIGN EXCHANGE MARKET IS A WORLD WIDE MARKET AND IS MADE UP OF:
1.Retail clients:made up of:
And the like who need foreign exchange.
They do not directly purchase or sell foreign currencies themselves.
They place buy/sell orders with the commercial banks.
They carry out buy/sell orders from the retail clients and buy/sell currencies on their
own account so as to alter(change) the structure of their assets and liabilities in
The banks deal either directly with the other banks or more usually through foreign
3. Foreign exchange brokers:
Banks do not trade directly with one another, rather they offer to buy and sell
currencies via foreign exchange brokers.these brokers collect buy and sell quotations
from most of the banks for many currencies,so that by going through the broker the
most favourable quotation is obtained quickly at very low costs.
Thus operating through such brokers is very advantageous. Each financial centre
normally has handful of authorized brokers through which commercial banks conduct.
These banks have been charged with responsibility of maintaining external
value of the currency of the country.
Two functional aspect:
Floating/fixed exchange rate.
In a fixed exchange rate system,the central bank takes necessary steps to
maintain the rate. This it does by purchasing the foreign currencies when
there is excess supply and sell the currencies when there is excess demand.
Central bank thus acts as a buffer between the forces of demand and supply
In floating exchange rate system,the central has to show orderliness in the
movement of exchange rates. This is achieved by central bank intervention.
If floating exchange rate-------there are no controls-----European rate will be
influenced forces of demand and supply-------on capital markets.
If supply(foreign exchange)>demand(foreign exchange) during a particular
Foreign exchange supply in market through exporters.
Foreign exchange demand in market through importers.
During a particular period
If D>S( F.E.)----- RISE IN PRICE OF FOREIGN EXCHANGE-----IMPORTS WILL BE
COSTLY-------THUS CURTAILED-------PROVIDE PROTECTION TO DOMESTIC
INDUSTRY---------------BUT IN SHORT RUN------DISTURBS THE ORDERLINESS
OF FOREIGN MARKET OPERATIONS.
Thus central banks would step in by selling foreign exchange and
buying(absorbing) domestic currency.
Demand(direct currency)+Supply(foreigncurrency)--------will maintain the
price(foreign exchange) at desired level.
“Intervention can be defined as buying or selling of foreign exchange by the
central bank of a country with a view to maintain the price of a given currency
against another currency.”
Speculators:- speculators seek to profit from changes in foreign exchange
rates based upon their expectations. This class of participants, actively expose
themselves to currency risk by buying and selling currencies in the forward
market to profit from exchange rate fluctuations. The speculators keep their
positions open. the participation of this class does not depend on their
business transaction in other currencies, instead these are based on current
prices in the forward markets and their expectations about the future spot
Arbitrators:-this class of participants seeks to earn risk-free profits by
seeking advantage of differences in the prices of currencies,in interest rates
among various countries. they use forward contract to hedge risk.
Hedgers:- many MNFs engage themselves in forward contract to protect the
home currency values of F.C. denominated assets and liabilities on their
balance sheet that are not to be realized over the life of contract.They also
hedge receivables and payables.
• High riskSpeculator
• No risk
• Low riskHedger
Exchange rate market has three segments:-
Transactions between R.B.I. and authorized
Transactions among authorized dealers.
Transaction among authorized dealers and
• The same day.
• On the next working day(tommorow).
• When the exchange of currencies
takes place on the second day,
working day after the date of deal is
called spot rate.
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