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Unit 2.1: Foreign currency, foreign transactions-trade and non trade, and role of participants inForex markets1Mrs. Charu Rastogi, Asst.Professor

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 Definition of foreign currency and foreigntransactions- trade and non trade, Role of participants in Forex markets2Mrs. Charu Rastogi, Asst.Professor

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 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, creditsand balance in any foreign currency◦ Drafts, travelers cheques, letter of credits or bill of exchange, expressedor drawn in Indian currency but payable in any foreign currency Foreign exchange rate is the value at which a country’s currency unitis exchanged for another country’s currency unit. Foreign exchange also refers to the global market where currenciesare traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex" andoccasionally as "FX.“3Mrs. Charu Rastogi, Asst.Professor

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 Trade transactions◦ Monetary movements that take place due to import/exporttransactions Non-trade transactions◦ Refer to all other foreign exchange transactions that are notimport or export trade transactions.◦ These include foreign inward and outward investments andforeign currency denominated loans and guarantees.4Mrs. Charu Rastogi, Asst.Professor

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 The market in which participants are able to buy, sell, exchange andspeculate on currencies. Foreign exchange markets are made up ofbanks, commercial companies, central banks, investment managementfirms, hedge funds, and retail forex brokers and investors. The forex marketis 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 & sellingof foreign currencies Because the currency markets are large and liquid, they are believed to bethe most efficient financial markets. Foreign exchange market is not a single exchange, but is constructed of aglobal network of computers that connects participants from all parts of theworld. The forex market has no centralized exchanges. All trades are over-the-counter deals, agreed and settled by individual counterparties known to oneanother.5Mrs. Charu Rastogi, Asst.Professor

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BanksMultinationalcommercialcompaniesCentral BanksHedge FundsInvestmentManagementfirmsRetail forexbrokersNon-bankForeign ExchangeCompaniesMoney Transferor RemittanceCompanies6Mrs. Charu Rastogi, Asst.Professor

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 The inter bank market is the major currencyexchange market participants playing an importantrole in currency trading market. This large market trades billions of dollars everysingle day and they have a great impact oninflation rates and the interest rates. The inter bank market is basically a controller interms of the money supplied, inflation rates andthe interest rates.7Mrs. Charu Rastogi, Asst.Professor

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

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 National central banks, other important market participants inforex trading play a significant role in forex trading market. Their role includes trying and controlling the currencysupply, interest rates and inflation rates. Banks are the currency exchange market participants whichusually have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves tostabilize the market. The National Central Banks make use of their foreign exchangereserves to stabilize the forex market. The stabilization strategy of most of these central banks isfocused towards the goal of buying when the currency exchangerate is low and to sell the currency when the rate goes high. Central Banks does not suffer from bankruptcy compared toother currency exchange market participants because of theirstocked foreign exchange reserves9Mrs. Charu Rastogi, Asst.Professor

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 It is believed that around 70 percent to 90 percent ofthe forex currency transactions are speculative. This means that a market participants in currencyexchange those have sold or bought the currency hasno plan to actually take delivery of the currency in theend. On the other hand, they were solely speculating onthe movement of that particular currency. The hedge fund comprises of private investment fundcharged with a performance fee that is limitedly open toa few qualified investors to join. These Forex market participants have an ability tocontrol equity of billion dollars and have the capacity toborrow for billion dollars more which can overwhelmthe Central Banks intervention in supporting anycurrency.10Mrs. Charu Rastogi, Asst.Professor

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

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

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 These non bank forex exchange companies marketparticipants in currency exchange offer currencyexchange and international payments to privateindividuals and companies. These are also called as forex brokers sometimeshowever, there is a little distinction as these nonbank foreign exchange companies do not offer anykind of speculative trading. These Forex market participants exchangecurrencies with payments which mean there isphysical delivery of currency to a bank account.13Mrs. Charu Rastogi, Asst.Professor

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

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15Mrs. Charu Rastogi, Asst.Professor