2. WHAT IS FOREIGN EXCHANGE?
• 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 .
3. CONTINUED…..
• 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
includes…
• (a) Deposits credits and balances payable in any foreign
currency.
• (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,
4. NATURE OF FOREIGN EXCHANGE….
• Affected by demand and supply.
• Affected by rate of interest.
• Affected by balance of payment surplus and deficit.
• Affected by inflation rate.
• Spot and forward rates are different.
• Affected by the economic stability of the country.
• Affected by the political condition of the country.
5. CHARACTERISTICS OF FOREIGN EXCHANGE….
• Its huge trading volume represent’s the largest asset class in the
world leading to high liquidity.
• Largest financial market .
• 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.
6. MARKET PARTICIPANTS….
• Central banks participate in the foreign exchange market to align currencies to
their economic needs.
Commercial companies
• 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.
Central bank
• 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.
8. OPERATION OF FOREIGN EXCHANGE
MARKET….
• 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.
• Principle characteristics:-
Spot Market is of daily nature. It does not trade in future
deliveries.
Spot rate of exchange is that rate which happens to prevail at the
time when transactions are incurred.
9. CONTD…..
• Forward Market:
Forward Market for foreign exchange is that market which handles such transaction
of foreign exchange as are meant for future delivery.
Principles Characteristics:-
It only caters to forward transaction.
It determines forward exchange rate at which forward transaction are to be
honored.
10. EXCHANGE RATE.
• ►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’s freely and are
determined by trading in the forex market.
11. MEASURES INITIATED TO DEVELOP FOREX
MARKET IN INDIA….
Institutional Framework
• Foreign Exchange Regulation Act (FERA), 1973 was replaced by the market
friendly Foreign Exchange Management Act (FEMA), 1999.
• Money and Securities Markets set up by the Reserve Bank in 1999 was
expanded in 2004 to include foreign exchange markets
12. ECONOMIC AGENTS AND TYPES OF ACTIVITIES
ON FOREIGN EXCHANGE MARKET…
Brokers: –
oAgents that connects dealers interested in buying and selling
foreign exchange, but does not become an active client in the
transaction.
o They provide their client, the bank, with the information
about the exchange rates at which banks are willing to
buy or sell a particular currency
13. CONTD….
oCentral banks:
• Foreign exchange market interventions are meant to influence the exchange rate
of the domestic currency in a way that is beneficial for the domestic economy and,
consequently, for the country
• It does not necessarily have a profit, it can also have a loss
14. CONTD….
• Arbitragers:
• They want to earn a profit without taking any kind of risk (usually
commercial banks) .
• Try to profit from simultaneous exchange rate differences in
different markets
15. CONTD….
Hedgers and Speculators:
Hedgers do not want to take risk while participating in the market, they want to
insure themselves against the exchange rate changes.
Speculators think they know what the future exchange rate of a particular
currency will be, and they are willing to accept exchange rate risk with the goal of
making profit .
