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Unit 2.1 Foreign Currency, Foreign Transactions- trade and non trade, and Role of Participants in Forex Markets

Unit 2.1 Foreign Currency, Foreign Transactions- trade and non trade, and Role of Participants in Forex Markets

In this presentation we discuss Definition of foreign currency and foreign transactions- trade and non trade, and Role of participants in Forex markets.

In this presentation we discuss Definition of foreign currency and foreign transactions- trade and non trade, and Role of participants in Forex markets.

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Unit 2.1 Foreign Currency, Foreign Transactions- trade and non trade, and Role of Participants in Forex Markets

  1. 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. 2.  Definition of foreign currency and foreign transactions- trade and non trade,  Role of participants in Forex markets 2Mrs. Charu Rastogi, Asst.Professor
  3. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 15. 15Mrs. Charu Rastogi, Asst.Professor

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