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Foreign Exchange


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Foreign Exchange

  1. 1. Foreign Exchange Foreign exchange is the system or process of converting one national currency into another, and of transferring money from one country to another
  2. 2. Foreign Exchange Market <ul><li>The foreign exchange market is a market in which foreign exchange transactions take place </li></ul>
  3. 3. Functions of foreign exchange market <ul><li>Transfer of purchasing power </li></ul><ul><li>Provision of credit </li></ul><ul><li>Provision of Hedging facilities </li></ul>
  4. 4. Transactions in the foreign exchange markets <ul><li>Spot and forward exchanges </li></ul><ul><li>Swap operations </li></ul><ul><li>arbitrage </li></ul>
  5. 5. Participants in foreign exchange markets <ul><li>Traders- commercial banks </li></ul><ul><li>Brokers- brokerages firms </li></ul><ul><li>Speculators- long position and short position </li></ul><ul><li>Hedgers </li></ul><ul><li>Arbitrageurs </li></ul><ul><li>governments </li></ul>
  6. 6. Determination of exchange rates <ul><li>Purchasing power parity (PPP)- Gustav Cassel </li></ul><ul><li>Balance of payment theory-Demand and supply theory </li></ul>
  7. 7. Exchange Rate Systems <ul><li>Fixed exchange rates </li></ul><ul><li>Flexible exchange rates </li></ul>
  8. 8. Convertibility of the Rupee <ul><li>Free convertible- </li></ul><ul><li>Partial convertibility -1992-93 in current account </li></ul><ul><li>LERMS- Market rate and Official rate </li></ul>
  9. 9. Why partial convertibility? <ul><li>1. to make foreign exchange available at a low price for essential prices. </li></ul><ul><li>At times of large deficit in current account- it is risky to go for full convertibility </li></ul><ul><li>To bring in a stability in rupee value </li></ul>
  10. 10. Merits of convertibility <ul><li>Real value of rupee </li></ul><ul><li>It encourages exports </li></ul><ul><li>Encourages import substitutions </li></ul><ul><li>Attracts remittances by NRIs </li></ul>
  11. 11. Eurocurrency market <ul><li>The money market in which Eurocurrency, currency held in banks outside of the country where it is legal tender, is borrowed and lent . </li></ul>