1.
Unit 2.1: Foreign currency, foreign transactions-
trade and non trade, and role of participants in
Forex markets
1Mrs. Charu Rastogi, Asst.Professor

2.
 Definition of foreign currency and foreign
transactions- trade and non trade,
 Role of participants in Forex markets
2Mrs. Charu Rastogi, Asst.Professor

3.
 Foreign exchange as defined by section 2 of FEMA,1999
◦ “Foreign currency” means any currency other than Indian currency
◦ “Foreign exchange” means foreign currency & includes deposits, credits
and balance in any foreign currency
◦ Drafts, travelers cheques, letter of credits or bill of exchange, expressed
or drawn in Indian currency but payable in any foreign currency
 Foreign exchange rate is the value at which a country’s currency unit
is exchanged for another country’s currency unit.
 Foreign exchange also refers to the global market where currencies
are traded virtually around-the-clock.
 The term foreign exchange is usually abbreviated as "forex" and
occasionally as "FX.“
3Mrs. Charu Rastogi, Asst.Professor

4.
 Trade transactions
◦ Monetary movements that take place due to import/export
transactions
 Non-trade transactions
◦ Refer to all other foreign exchange transactions that are not
import or export trade transactions.
◦ These include foreign inward and outward investments and
foreign currency denominated loans and guarantees.
4Mrs. Charu Rastogi, Asst.Professor

5.
 The market in which participants are able to buy, sell, exchange and
speculate on currencies. Foreign exchange markets are made up of
banks, commercial companies, central banks, investment management
firms, hedge funds, and retail forex brokers and investors. The forex market
is considered to be the largest financial market in the world.
 Foreign exchange market is a place where foreign moneys are bought & sold.
 Foreign exchange market is an institutional arrangement for buying & selling
of foreign currencies
 Because the currency markets are large and liquid, they are believed to be
the most efficient financial markets.
 Foreign exchange market is not a single exchange, but is constructed of a
global network of computers that connects participants from all parts of the
world.
 The forex market has no centralized exchanges. All trades are over-the-
counter deals, agreed and settled by individual counterparties known to one
another.
5Mrs. Charu Rastogi, Asst.Professor

6.
Banks
Multinational
commercial
companies
Central Banks
Hedge Funds
Investment
Management
firms
Retail forex
brokers
Non-bank
Foreign Exchange
Companies
Money Transfer
or Remittance
Companies
6Mrs. Charu Rastogi, Asst.Professor

7.
 The inter bank market is the major currency
exchange market participants playing an important
role in currency trading market.
 This large market trades billions of dollars every
single day and they have a great impact on
inflation rates and the interest rates.
 The inter bank market is basically a controller in
terms of the money supplied, inflation rates and
the interest rates.
7Mrs. Charu Rastogi, Asst.Professor

8.
 Multi national commercial companies are also one of the
important market participants in foreign exchange trading.
 The role of multinational companies in forex trading involves
carrying out the financial activities seeking currency exchange
to pay for goods and services.
 These participating companies have a little influence on the
currency rates however they can contribute fairly well in the
forex market with unpredictable outcomes.
 The small amount traded by these commercial companies as
compared to other forex market participants in forex trading
like banks or speculators and their trades often have little
short term impact on market rates.
 Nevertheless, trade flows undertaken by these companies are
an important factor in the long-term direction of a currency's
exchange rate.
8Mrs. Charu Rastogi, Asst.Professor

9.
 National central banks, other important market participants in
forex trading play a significant role in forex trading market.
 Their role includes trying and controlling the currency
supply, interest rates and inflation rates.
 Banks are the currency exchange market participants which
usually have official or unofficial target rates for their currencies.
 They can use their often substantial foreign exchange reserves to
stabilize the market.
 The National Central Banks make use of their foreign exchange
reserves to stabilize the forex market.
 The stabilization strategy of most of these central banks is
focused towards the goal of buying when the currency exchange
rate is low and to sell the currency when the rate goes high.
 Central Banks does not suffer from bankruptcy compared to
other currency exchange market participants because of their
stocked foreign exchange reserves
9Mrs. Charu Rastogi, Asst.Professor

10.
 It is believed that around 70 percent to 90 percent of
the forex currency transactions are speculative.
 This means that a market participants in currency
exchange those have sold or bought the currency has
no plan to actually take delivery of the currency in the
end. On the other hand, they were solely speculating on
the movement of that particular currency.
 The hedge fund comprises of private investment fund
charged with a performance fee that is limitedly open to
a few qualified investors to join.
 These Forex market participants have an ability to
control equity of billion dollars and have the capacity to
borrow for billion dollars more which can overwhelm
the Central Bank's intervention in supporting any
currency.
10Mrs. Charu Rastogi, Asst.Professor

11.
 The major work of these firms is the management
of large accounts like pension funds and
endowments.
 The management is done on customer’s behalf and
these financial investment firms make use of
currency trading market to facilitate money
transactions in foreign securities.
11Mrs. Charu Rastogi, Asst.Professor

12.
 The retail forex brokers are those market participants in foreign
exchange trading who are responsible for only 2% of the total forex
market trade.
 Many forex brokers who don’t have appropriate experience in forex
trading can be a vulnerable target to forex scams.
 Basically there are two types of retail brokers market participants in
forex trading offering speculative trading; retail forex brokers and
market makers.
 Out of these two types of market participants in currency exchange
 Although a small fraction of this market, the retail traders are may only
engage in indirectly through brokers or banks and market makers which
trade against their clients and quite often take the other side of their
trades.
 Often creating potential differences of interest and giving rise to some
of the unpleasant experiences some traders have had.
 Steps have been taken to resolve some of these concerns and restore
trader confidence, but caution is still advised in ensuring that all is as it
is presented.
12Mrs. Charu Rastogi, Asst.Professor

13.
 These non bank forex exchange companies market
participants in currency exchange offer currency
exchange and international payments to private
individuals and companies.
 These are also called as forex brokers sometimes
however, there is a little distinction as these non
bank foreign exchange companies do not offer any
kind of speculative trading.
 These Forex market participants exchange
currencies with payments which mean there is
physical delivery of currency to a bank account.
13Mrs. Charu Rastogi, Asst.Professor

14.
 Money transfer companies or remittance
companies are market participants in currency
exchange which are known for performing high-
volume low-value transactions generally by
migrants back to their home country.
 The largest markets of these kind of transactions
are India, China, Mexico and Philippines and the
biggest known currency exchange market
participants in this category is Western Union which
has about 345,000 agents globally.
14Mrs. Charu Rastogi, Asst.Professor

15.
15Mrs. Charu Rastogi, Asst.Professor