• Foreign Exchange
The system of converting one national
currency into another, or of transferring
money from one country to another.
• Foreign Exchange Market
Forex market is a place in which foreign
exchange transactions take place.
A market in which National currencies are
bought and sold against one another
The foreign exchange market is one of the
largest markets in the world. By some
estimates, about 3.2 trillion USD worth of
currency changes hands every day.
Indicative on Friday April 16, 2010
Forward Spot Spot Forward
6 months 3 months 1 month TT * Bill TT* Bill 1 month 3 months 6 months
45.26 44.85 44.58 44.42 44.46 US Dollar 44.34 44.32 44.5 44.78 45.19
61.23 60.69 60.32 60.11 60.15 Euro 60.00 59.99 60.21 60.59 61.14
69.92 69.32 68.93 68.69 68.74 Pound Sterling 68.57 68.56 68.81 69.23 69.84
48.84 48.36 48.05 47.87 47.90 Japanese Yen* 47.75 47.74 47.95 48.26 48.72
42.8 42.38 42.1 41.94 41.97 Swiss Franc 41.83 41.82 42.01 42.28 42.7
8.22 8.15 8.11 8.08 8.09 Danish Kroner 8.06 8.06 8.09 8.14 8.21
32.96 32.67 32.47 32.36 32.38 Singapore Dollar 32.29 32.28 32.42 32.61 32.91
5.84 5.78 5.75 5.72 5.73 Hong Kong Dollar 5.71 5.71 5.73 5.77 5.83
41.27 41.35 41.53 41.38 41.40 Australian Dollar 41.32 41.31 41.45 41.57 41.65
31.9 31.84 31.79 31.74 31.76 New Zealand Dollar 31.68 31.68 31.79 31.92 32.08
7.65 7.61 7.59 7.57 7.58 Norwegian Kroner 7.55 7.55 7.59 7.62 7.67
6.33 6.24 6.24 6.21 6.22 Swedish Kroner 6.20 6.20 6.22 6.26 6.32
45.07 44.73 44.47 44.31 44.34 Canadian Dollar 44.21 44.20 44.39 44.66 45.06
Source: State Bank Of India, Chennai
*TT - Telegraphic Transfer
Features of Foreign Exchange Market
The foreign exchange market is unique because of
trading volume results in market liquidity
continuous operation: 24 hours a day except
the variety of factors that affect exchange rates
the low margins of relative profit compared with
other markets of fixed income
the use of leverage to enhance profit margins
with respect to account size
& central banks
Functions of Forex Market
• Transfer of Purchasing power
• Provision of credit
• Provision of hedging facilities
Determinants of Foreign Exchange
Long – term Factors Short-term Factors
• Strength of economy
The relative strength of an
economy has effect on demand
and supply of foreign currencies.
If an economy is growing at a
faster rate, in the long-run, it is
generally expected to have a
better performance on Balance
of Trade .
• Interest rate
The capital is attracted
towards currencies yielding
higher interest rates,
there is full currency
convertibility in capital
A higher rate of inflation will make a
country’s currency less attractive
because of the loss of real value with
◦ Hence, that currency would
against major currencies.
• Money Supply
An increase in money
supply will affect the
exchange rate through
causing inflation in the
country. It can also affect
the exchange rate directly
in the short run.
• National Income
An increase in the
national income will lead
to an increase in
investment or in
accordingly, its effect on
rate will change.
Short term factors
• Central bank intervention
Buying and selling of
foreign currency in the
market by the Central
Bank with a view to
increasing the supply or
demand, there by
affecting the exchange
rate, is known as
• Export receipts and import payments
between the total
from export bill
import payments on
a given day in a
the exchange rate to
• Foreign investment flows
Both foreign direct
inflows and outflows
affect the exchange
• Political factors
Factors like war.
election results, oil
price increase etc
If a few big
buying a currency
in an aggressive
may follow suit.
Thus, the demand
of the currency
• Capital Movements
Movement will be caused by
borrowings and assistance.
borrowing will have favorable
effect on the exchange rate of
the country’s currency.
• The Foreign Exchange Management Act or in short FEMA has been introduced as a
replacement for earlier Foreign Exchange Regulation Act (FERA). FEMA came into
act on the 1st day of June, 2000.
The main objective behind the Foreign Exchange Management Act (1999) is to
consolidate and amend the law relating to foreign exchange with objective of
facilitating external trade and payments and for promoting the orderly
development and maintenance of foreign exchange market in India.
FEMA is applicable to the all parts of India. The act is also applicable to all
branches, offices and agencies outside India owned or controlled by a person who
is resident of India.
FEMA head-office also known as Enforcement Directorate is situated in New Delhi
and is headed by a Director. The Directorate is further divided into 5 zonal offices
at Delhi, Bombay, Calcutta, Madras and Jalandhar and each office is headed by a
Deputy Directors. Each zone is further divided into 7 sub-zonal offices headed by
the Assistant Directors and 5 field units headed by the Chief Enforcement Officers
• Liquid Investment- foreign exchange market has the advantage of being
extremely liquid. What this means is that investors would be able to
withdraw from their investments at any point in time relatively easily.
This is due to the fact that the foreign exchange market has a global
market, which means searching for a buyer to purchase a particular
currency which you are interested to sell is usually not a big problem.
• Convenience-foreign currency exchange trading is extremely convenient.
Organized as an over-the-counter market, foreign exchange traders from
all over the world are brought into contact each day via the internet. This
means that traders would be able to trade with one another 24 hours a
day, five days a week.
• FACILITATES TRADE AND DEVELOPMENT