The document discusses foreign exchange management. It begins by defining the foreign exchange market (forex) as a worldwide decentralized market for trading currencies. It then lists some key currencies and their codes. It describes characteristics of the forex market, including that it operates 24 hours a day from locations around the world. It also discusses currency appreciation/depreciation. The document then provides more details on different parts of the forex market including spot markets, forward markets, and derivatives markets. It describes how interbank foreign exchange trading works and participants in the forex market like individuals, banks, and governments.

1. Foreign exchange management

2. WHAT IS FOREX?The foreign exchange market (FOREX) is a worldwide decentralized over-the-counter financial market for the trading of currencies.In simple words, it is a place where one currency is exchanged with another currency based on fluctuation rates.

3. Codes for selected Currenciesrequired for quotesUSD – US Dollar EUR – EuroGBP – British Pound IEP – Irish Pound JPY – Japanese Yen CHF – Swiss FrancCAD – Canadian Dollar AUD – Australian DollarSEK – Swedish Kroner MEP – Mexican PesoDKK – Danish Kroner NZD – New Zealand $INR – Indian Rupee SAR – Saudi Riyal

4. CHARACTERISTICS OF FOREIGN EXCHANGE MARKET2. Only market open 24 hours - FX Market is a 24 hour market- It starts when a calendar business day opens in Sydney, Tokyo, Hong Kong, Singapore and then moves to Middle East to Europe to New York to the West Coast of United States where the calendar business comes to a close- FX Market operates seven days a week (Middle East Markets function on Saturdays and Sundays)- Effectively it is a 24 hour a day / seven days a week / 365 days a year Market!

5. Currency appreciation/depreciationIncrease in foreign currency priceFrom Rs.46 to Rs.48/ USDForeign currency appreciationHome currency depreciationFrom USD 0.0217 to USD 0.0208/ Re

6. ©2004 Prentice Hall8-6A Day of Foreign-Exchange Trading

7. Foreign exchange marketsOrganisational setting within which individuals, governments and banks buy and sell foreign currencies.

8. Only a small fraction of daily transactions in foreign exchange involve trading of currency.

9. Most foreign exchange transactions involve transfer of bank deposits.Foreign Exchange Markets Spot marketsForward marketsFutures markets (In India, yet not permissible) Options marketsSwaps markets

10. Foreign exchange marketForeign exchange marketRetailwholesaleBank and money changes(currencies and bank note, cheques)Interbank(Bank account or deposits)Central bank DirectIndirect(Through broker) SpotDerivatives(Future options etc.) Forward

11. Interbank Foreign Exchange TradingAbout 90% of foreign exchange trading is in the Interbank part of the market.

12. Interbank Foreign Exchange TradingProvides continuous information on the foreign exchange market—Talking with traders at other banks.Observing prices (exchange rates) being quoted.

13. Foreign Exchange and Forward ContractsWhat is a forward foreign exchange contract?(An agreement to exchange one currency for another on some date in the future at a price set now [the forward exchange rate]).

14. Participants of FE MarketThe participants in the foreign exchange market are:-IndividualsFirmBanksGovernmentsInternational Agencies

15. How a Foreign Exchange Transaction is Conducted

16. Balance of PaymentsB of P – is a record of the value of all economic transactions between residents of a country

17. Need and Importance of Foreign Exchange Markets Foreign exchange markets represent by far the most important financial markets in the world. Their role is of paramount importance in the system of international payments. In order to play their role effectively, it is necessary that their opera­tions/dealings be reliable. Reliability essentially is concerned with contractual obligations being honored. For instance, if two parties have entered into a forward sale or purchase of a currency, both of them should be willing to honors their side of contract by delivering or taking delivery of the currency, as the case may be.Types of foreign exchange ratesReady/cash- Settlement of funds on the same day (date of the deal).

18. Tom- Settlement of funds takes place on the next working day of the date of the deal.

19. Spot- Settlement of funds takes place on the second working day following the date of the deal.FOREX SYSTEM IN BANKINGFOREXREMITTANCEEXPORTIMPORTimportexportphysicalnon-physicalOutright sale basicConsignment basicMerchandise and software

20. Theory of Purchasing Power Parity (PPP)The prices of tradable goods, when expressed in a common currency, will tend to equalize across countries as a result of exchange rate changesOccurs because process of buying goods in a cheap market and reselling them in expensive market affects demand for (and price of) the foreign currency and the market price of the good in the two product markets in question©2004 Prentice Hall8-18