The currency markets can be
classified as cash and derivative market . Cash market
can again be divided into;
Euro currency market
Foreign exchange market
Euro Currency Market : Euro
currency market enables investors to hold short term
claim on commercial banks, which then act as these
deposits into long term intermediaries to transform
claim on final borrowers.
There are three common
reference rate are included under the Euro currency
market such as:
LIBOR London Inter Bank Offered
PIBOR Paris Inter Bank Offered rate.
Singapore Inter Bank Offered
Foreign Exchange Market : In Foreign
Exchange Market, currencies are bought and sold against
each other. It is the world’s largest market with a daily
turnover of $ 3.5 trillion a day. Most trading takes place in a
few currencies such as :
• US Dollar
• Pakistan rupee
• Canadian Dollar
The Indian Foreign market is very small as
compare to the global market. The Indian turnover is
around $ 5 – 10 Billion per day.
The Foreign exchange
market is the world wide market in scope and the
major world’s trading centers are in Tokyo, Singapore,
New York and San Francisco.
Features of Foreign Exchange
1. Over the counter : The foreign exchange market is an over
the counter market. It does not denotes a particular place or
floor where dealers assemble and transact foreign currencies.
2. Operates 24 hours : Foreign exchange market is also known
as round the clock market. Foreign exchange dealer are spread
all over the globe, the time of transaction differ from one place
to another depending upon the longitude of the place.
3. convertible currencies : The currencies transacted in the
foreign exchange market are normally the strong, stable and
convertible which are great demand because of their strong,
stable and convertible .
4. Involvement of two countries : In foreign exchange
management minimum two countries are involved.
5. Payment in foreign currency : Each country has its own
currency. Payment for import good is made in foreign currency
and payment for export is also received in foreign currency.
The Foreign Exchange market performs the
various functions as:
Transfer of funds
Commercial banks operates as
clearing house for the Foreign
To identify the level of transaction
To determine and consider the
foreign exchange rates
Transfer of Funds : The principle function of foreign exchange
market is the transfer of funds from one nation to another
nation and one currency to another currency.
Commercial banks operates as clearing house for the foreign
exchange market : Commercial banks of particular country
operates as clearing house for the foreign exchange demanded
and supplied in the course of foreign transaction by the nation’s
To identify the levels of transaction and participants :The level of
transaction or participants can be classified/identified in
foreign exchange market such as:
• At first level : Tourists, Importers, Exporters, Investors and so
• At second level : Commercial bank which act as clearing
house between users and earners of foreign exchange.
• At third level : Foreign exchange brokers through whom
nation’s commercial banks even out their foreign exchange
inflows and outflows among themselves.
• At fourth level : The nation’s central bank which act as the
lender and buyer of last resort when nations total foreign
exchange earnings and expenditure are equal.
To determine and consider the foreign exchange rate : The
rate at which currencies exchange from one another will have
to change to equilibrates the total quantity demanded and
the supplied if such an adjustment in the exchange rate were
not allowed ;the nation’s commercial banks would have to
borrow from the central bank.9/24/2013 12