The document provides an overview of the foreign exchange market, including: - The foreign exchange market allows buyers and sellers to exchange currencies from different countries through an over-the-counter network. Major currencies like the US dollar are highly liquid and traded globally. - Key participants include central banks, commercial banks, companies, traders, and brokers. The market operates 24/7 through electronic networks and transactions include spots, futures, forwards, options and swaps. - Factors like inflation, interest rates, monetary policies, and economic performance impact exchange rates. The market facilitates international trade and investment while also providing hedging against currency risk. However, leverage and counterparty risks are disadvantages.

1. FOREIGN EXCHANGE MARKET
Dr. Sunita Sukhija
Assistant Professor in Commerce
Govt. National College, Sirsa(HRY)

2. MEANING OF FOREX MARKET
 The Foreign Exchange Market is a market where foreign
currencies are bought and sold.
E.g. Indian Importer has to pay in Dollar($) if he imports from USA
Rs.67.01/$1
 The foreign exchange market or the ‘forex market’, is a system
which establishes an international network allowing the buyers and
sellers to carry out trade or exchange of currencies of different
countries. A forex market can be stated as one of the most
liquid financial markets which facilitate ‘over-the-counter’ exchange
of currencies.
 In New York, advanced telecommunication technology called
Society for Worldwide Interbank Financial Telecommunications
(SWIFT) is used by the banks for carrying out foreign exchange
transactions at the electronic clearinghouses like Clearing House
Interbank Payment System (CHIPS).

3. CHARACTERISTICS OF THE FOREIGN EXCHANGE
MARKET
 “Over-The-Counter” Market: In different
countries, the forex market is the highly
unregulated market initiating over the counter
trade by the banks through telex and telephone.
 High Liquidity: The currency is considered to
be the most widely traded financial instrument
across the globe, making the forex market
highly liquid.
 Twenty-Four Hour Market: The foreign
exchange market is operational for twenty-four
hours of the day, initiating the active trade and
exchange of currencies at any time.

4.  Market Transparency: It is effortless to monitor the fluctuations
in the value of currencies of different countries in a forex market
easily through account tracking and real-time portfolio, without the
involvement of brokers.
 Dollar is Extensively Traded Currency: The USD, which is
paired with almost every country’s currency and listed on the
forex, is the most widely traded currency in the world.
 Most Dynamic Market: The value of the currencies in the forex
market keeps on changing every second and function twenty-four
hours a day. This makes it one of the most active markets in the
world.
 International Network of Dealers: The foreign exchange market
establishes a medium among the dealers and also with the
customers. There are dealer’s institutions located globally to carry
out the exchange and trading activities.

5. PARTICIPANTS IN THE FOREIGN EXCHANGE
MARKET
 Central Bank: The central bank regulates the exchange rates of the
currency of their respective country to ensure fluctuations within the
desired limit and keep control over the money supply in the market.
 Commercial Banks: The commercial banks are the medium of forex
transactions, facilitating international trade and exchange to its
customers along with other forex functions like making foreign
investments.
 Traditional Users: The traditional users involve foreign tourists,
companies carrying out business operations across the globe, patients
taking treatment in other country’s hospitals and students studying
abroad.
 Traders and Speculators: The traders and speculators are the
opportunity seekers and look forward to making a profit through trading
on short-term market trends.
 Brokers: They are considered to be financial experts who act as an
intermediary between the dealers and the investors by providing the
best quotations.

6. TRANSACTIONS IN FOREIGN EXCHANGE MARKET
 Spot Market Transactions
 The forex transactions which are executed immediately, or usually
within two days, is known as the spot transaction. Such a forex
market is termed as a spot market, and the rate of exchange is
called a spot rate.
 Futures Market Transactions
 The market in which the exchange of currencies involve a future
delivery and payment and the rate of exchange for the same is
pre-determined is called a futures forex market. Such exchange
rate is known as a future rate. It protects the buyer from the risk
of a rise in the value of the currency.
 Forward Market Transactions
 A forward forex market is however very similar to the futures
market, but here, the terms of the contract are negotiable and can
be amended by any of the parties involved.

7.  Options: In an options contract, the holder is not bound
to but have the right to buy or sell the specified asset
quantity at the pre-determined price on the specific future.
 Futures: In a future contract, the quantity of an asset,
date of execution and price of the contract is fixed and
standardized.
 Swap: Usually, commercial banks adopt swap contracts if
they perform forward exchange business operations.
Here, they sell off a particular currency in the spot market
to buy that same currency in the forward market.
 Arbitrage: The rigorous buying and selling of different
currencies in the forex market to fetch gains out of such
transactions are called arbitrage.

8. FUNCTIONS OF FOREIGN EXCHANGE MARKET
 Hedging Function: The globally trading business
entities can hedge the risk of currency fluctuations by
adopting means like a letter of credit or forward
contract. Here, the goods are to be delivered on a
pre-determined future date and at a mutually agreed
price.
 Transfer Function: The forex market majorly
functions to exchange the currency of one country
into that of other, to facilitate international trade
activities.
 Credit Function: Providing the credit facility at the
time of making overseas payments through foreign
bill of exchange to its maturity or execution, is
another significant function of the forex market.

9. FACTOR AFFECTING EXCHANGE RATE
 Impact of Inflation
 Interest Rate
 Intervention by Monetary Authorities
 Bandwagon Effect
 Country’s Current Account / Balance of
Payments
 Government Debt
 Terms of Trade

10. ADVANTAGES OF FOREIGN EXCHANGE MARKET
 High Leverage: A forex investor can avail the facility of leverage or loan
of up to 20 or 30 times of his/her capacity, for trading in the forex market.
 International Trade: Every country has its currency and therefore, to
facilitate trade activities between two countries, the forex market is
essential.
 Trading Option: For the speculators or traders, foreign exchange
market is just like other financial markets where they can make money
on short term fluctuations in the currencies.
 Flexibility: We know that the forex market is a twenty-four-seven
market, and there is no minimum or maximum limit of the exchange
amount. It provides the flexibility of investment or exchange to the
traders.
 Hedging Risk: The forex market provides for hedging the risk of loss on
currency fluctuations while carrying global business operations and
trading in foreign currency.
 Low Transaction Costs: Since brokers are not very much entertained
in the forex market, the transaction cost (called as ‘spread’) charged by
the dealers is reasonably low if compared to other financial markets.
 Inflation Control: To maintain the economic stability in the country and
control situations like inflation, the central bank maintains a forex
reserve which consists of currencies of different countries around the

11. DISADVANTAGES OF FOREIGN EXCHANGE
MARKET
 Leverage Risks: Leverage refers to loan in other terms. Forex
market initiates the leverage of up to 20 to 30 times the
investment capacity of the traders or speculators, which may
even lead the loss of the entire amount of the investor.
 Counterparty Risks: The forex is highly unregulated with no
central authority for currency exchange or trading risk
mitigation. Thus, it may encounter the risk of non-fulfilment of
the obligations by any of the parties involved in such a contract.
 Operational Risks: Since forex is a twenty-four hours market,
it is difficult to manage its operations by humans. As a result,
the traders and MNCs rely on the algorithms, and trading desks
spread, respectively, to safeguard their investment in their
absence.

12. CONCLUSION
 Foreign exchange market as it exists today is well
structured and well regulated by the RBI and also by
a voluntary association, Foreign Exchange Dealers
Association (FEDA). The dealers authorized by the
RBI can engage in the transactions.
 The foreign exchange market in India operates
essentially from seven major centres, viz., Calcutta.
Delhi, Chennai, Mumbai, Bangalore, Kochi and
Ahmedabad, with Mumbai claiming bulk of the
transactions. FEDA plays facilitating role in the
market, laying down the ground rules for fixation of
commissions and other charges. It also handles the
matters relating to the interests of the ADs.

13. THANKS