MEANING OF THE TERM FOREX MANAGEMENT
It is the exchange of currencies in terms of another
It refers to a system whereby one currency is
exchanged for or converted to another. It is also a
system by which commercial nations discharge
their debts to each other.
Foreign currencies are collectively referred to as
Foreign Exchange also involves:
The method by which the currencies are exchanged
The need for such exchange of currencies
The various forms by which such exchanges takes place
The ratio or equivalent values at which such exchanges are
DEFINITION OF FOREIGN EXCHANGE
Section 2 FERA, 1973 defines it as:
a. All deposits, credits, balance payable in any foreign
b. Any drafts, travelers cheques, LoC, BoE expressed or
drawn in Indian currency and payable in foreign
c. Any instrument giving anyone the option of making it
payable either partly or fully in a foreign currency
o Hence the term foreign exchange means coins, bank
notes, postal notes, postal orders, electronic fund transfer
and money orders
o Dr. Paul Einzig:-
o a system or a process of converting one national
currency into another and of transferring money
from one country to another.
FOREIGN EXCHANGE MARKET
It is the market where one currency (foreign currency) is
bought and sold against another currency (domestic or
borrowing from or lending to foreigners.
exchange dealers do the job of the exchange of
the demand and supply in the foreign exchange
markets permits the establishment of the rate of one
currency in terms of another.
FOREX MARKET CONT…
the transaction in the foreign exchange market can be
either to exchange cash or to buy/sell some other
The major instruments are:
the foreign exchange market is the largest financial
market in the world.
is open somewhere or the other in the world all the time
such that it is said to be a 24 hours-a-day and 365 days-
The market can be divided into three major market
Australasia includes Sydney, Tokyo, Hong kong, Singapore
Europe includes Zurich, Frankfurt, Paris, Brussels, Amsterdam
North America includes New York, Montreal, Toronto, Chicago,
San Francisco and Los Angeles.
FOREX MARKET CONT…
COMPONENTS OF A FOREX TRANSACTION
FOREIGN EXCHANGE RATE QUOTE
Quote: when the currency is quoted, it is done in relation to another
currency, so that the value of one is reflected through the value of
Forex rates are always quoted in two ways:
Indirect Quote: "The expression of an exchange rate in terms of the number
of units of a foreign currency corresponding to a single unit of the domestic
currency. In EU countries
a direct quote for the US dollar might be [euro]0.63.
1USD = euro 0.63
IUSD = Rs 58.55
Direct Quote: "An exchange rate expressed in terms of the number of units
of domestic currency corresponding to one unit of the foreign currency. In
an indirect quote for the dollar might be
1 euro =$1.5873
1 INR = USD 0.01707
Oxford University Press Dictionary of Finance and Banking
FOREX RATE QUOTATION
Bid Price: it is the price at which the forex market is ready
to buy a specific currency pair in the forex trading market.
This is the price at which the traders of forex market buys his
In a forex quote, the forex price that appears on the lift side is
the bid price
For eg: EUR/USD = 1.2342/47
Ask Price: is the price at which the market is ready to sell
a certain currency pair in the forex market.
This is the price at which the market buys a foreign currency.
It appears on the right side of the forex price quote.
Spread: It is the difference between the Ask and Bid price.
It is set by the liquidity of the stock
If the stock is highly liquid, it means that the stock is highly
traded in the and the bid/ask spread will be low and V.V..
Pips: The pipe is the smallest amount, a price can move in
any currency quote.
It is also known as the point.
USD/JPY = 119.50/58
the currency on the left side is called the base currency
The currency on the right side is called the quote/ counter
The base currency will always be equal to one unit and the
counter currency is what that one base currency unit is equaling
Here 1 USD = 119.50 JPY
The currency exchange rate between two currencies,
both of which are not the official currencies of the
country in which the exchange rate quote is given it is
called a cross rate.
if an exchange rate between the Euro and the Japanese Yen
was quoted in an American newspaper, this would be
considered a cross rate
However, if the exchange rate between the euro and the U.S.
dollar were quoted in that same newspaper, it would not be
considered a cross rate because the quote involves the U.S.
This phrase is also sometimes used to refer to currency
quotes which do not involve the U.S. dollar, regardless of
which country the quote is provided in.
Ie, when a currency quote is given in without the USD as
one of its component, it is also referred to as cross
The most common cross rate pairs are:
SPOT MARKET (CONT…)
The exchange rate determined in sport market is
known as spot exchange rate
These rates are determined by the demand and
supply of foreign currencies being exchanged in the
global foreign exchange market
In a forward market, the parties enter into foreign
It is an agreement between two parties to exchange
one currency for another at some future date, with
the exchange date and delivery date and the
quantity involved being fixed at the time of the
It is typically traded only on over the counter market
It is recognizing the price differences b/w markets and
simultaneously buying in one market and selling in another
Forex Arbitrage is a method of trading used by forex
traders who attempt to make money on the inefficiencies
observed in the pricing b/w a pair/ pares of currencies.
FIXED EXCHANGE RATE SYSTEM
The exchange rate b/w home and foreign currencies are
held constant and are allowed to fluctuate only within a
When this exchange rate moves beyond this permitted
margin, the monetary authorities of a country intervene
This authority may even devalue the home currency to
maintain the stability in the exchange rate.
Eg: Cuba, N.Korea
The exchange rate b/w home and foreign currency is
determined purely by the market forces of demand and
There will not be any intervention by the monitory authority
in fixing the exchange rate.
When demand of home currency exceeds supply, home
currency becomes stronger
When supply of home currency exceeds demand, home
currency becomes weaker.
Eg: USA, S. Africa, Peru, Denmark, Paraguay
It lies b/w fixed and free float
Forex rate is primarily market forces
Monetary authorities do interfere to avoid high
Here it is necessary for the central bank to maintain
a certain foreign exchange reserve
It is required coz, the central bank can buy or sell forex
reserve to influence exchange rate movement
The value of home currency is pegged or linked to
a foreign currency or to a basket of foreign
Here the exchange rate with other currency would
be in line with the movement of these currencies
with the pegged currencies.